Credit Couseling Vs. Bankruptcy

If you're considering credit counseling or bankruptcy to deal with debt problems, weigh the pros and cons of each before choosing a debt solution.

Credit Counseling vs. Bankruptcy

How Much Do You Owe

You can't determine how to manage your debt unless you can attach a number to it. Get your medical bills, credit card statements and loan statements together and add them up. (Keep in mind that student loans cannot be discharged through bankruptcy.) Figure out how much you owe, what the interest rate is, and what the monthly minimums are.

Making a Tally

Make a list of all your regular monthly bills and your monthly income. Subtract what has to be paid from your income. Is there enough left over to pay toward your debt each month after you've covered the essentials? If you have some breathing room, you might want to consider credit counseling. If not, bankruptcy might be your best option.

Credit Repercussions

A Chapter 7 bankruptcy will stay on your credit for 10 years. It will impair your ability to get financing for a car, home or other loan. It might also affect your ability to get hired. While credit counseling can stay on your credit for up to seven years, the affect it has on your credit is far less severe.

Other Consequences

Apart from the damage to your credit, bankruptcy also damages your credibility and makes you look like a risk to potential lenders as well as employers. There is also a possibility that any forgiven debt might have to be reported as income on your taxes. While credit counseling can also negatively affect your credit, it also shows that you are willing to take responsibility for your problems.

The Real Issue

Bankruptcy only makes your debt go away; it doesn't solve the issues that might have caused you to go into debt in the first place. Credit counseling can teach you how to budget and to manage your money in a way that will keep you from racking up debt again.