• 22
  • August
    2011

In our previous post, we began discussing the benefits and drawbacks of both credit counseling and bankruptcy. Here we continue that discussion.

As an alternative to bankruptcy, credit counseling has both positives and negatives. In terms of the benefits of credit counseling, consider the following.

• In the credit counseling process, you will avoid filing for bankruptcy

• Bills can be consolidated into a single monthly payment lasting between three and five years

• Your credit score will likely remain the same, though this may not be universally true

• Strict monthly payments help keep you disciplined

As for the negatives of credit counseling:

•· The process doesn't always work out. According to some in the field, around 47 percent of consumers who go into a formal debt management programs eventually drop out. What is more, only around one-fifth of consumers who inquire about such programs actually enroll in one, according to a recent survey by Cambridge Credit Counseling of Agawam, Massachusetts.

• Lenders will still consider you a credit risk if you are going through credit counseling. Involvement in such a program is reflected on your credit score, and most lenders will not lend until the counseling period ends and you credit is somewhat improved. That could be between four and six years after beginning such a program.

• Employment opportunities may be limited, as with bankruptcy.

• Not all creditors may be consolidated through the credit counseling process, which means some would have to be paid through the counseling agency, but not others.

There are positives and negatives to both bankruptcy and credit counseling. Each person is different with their particular needs and their specific financial situation, and needs to determine for himself or herself what is the best way out of debt. Knowing the relative benefits and drawbacks of each path is helpful in making that decision.

Source: Fox Business, "Credit Counseling: Damaging as Bankruptcy?," Justin Harelik, August 16, 2011.