Bankruptcy vs. Consumer Credit Counseling

Consumers who are over their heads in debt have several options for reducing or eliminating that debt. Two effective choices are bankruptcy and consumer credit counseling. Another option is debt settlement, in which a consumer negotiates a lower balance with his creditors and pays that full amount in one lump sum.

Identification

There are distinct differences between bankruptcy and consumer credit counseling. When a consumer takes part in a credit counseling program, the agency will try to make debt payments more affordable by negotiating lower interest rates and a longer payment agreement, resulting in lower monthly payments. In bankruptcy, the consumer goes through the court system to eliminate her debt.

Types

There are two types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 allows a consumer to dissolve most or all of his debts and leave the process with a "clean slate." He can walk away from his debt and start over free and clear.

Chapter 13 gives the consumer the option of paying off all or a portion of his debts within a reasonable and affordable time that is determined by the court. The judge may reduce some of the consumer's debts to make this goal more feasible.

Time Frame

A Chapter 7 bankruptcy is automatic after the process of court proceedings is over. As soon as a Chapter 7 bankruptcy is discharged, the consumer is free of her debts that it covers.

A Chapter 13 bankruptcy usually comes with a payment plan of three to five year s. Once that time is up and the debtor has made all of his scheduled payments on time, the remaining debt is eliminated.

Consumer credit counseling also takes several years in most cases. The exact amount of time depends on how much debt the consumer brings to the table, and what interest rates the agency is able to negotiate with creditors.

Considerations

Both options require some form of financial counseling. For bankruptcy, both Chapter 7 and Chapter 13, the law requires that consumers take part in a financial education class before filing. The program taken must be approved by the U.S. Trustee's office. With consumer credit counseling, each agency usually provides financial counseling for people who are in its program.

Benefits

The biggest benefit of consumer credit counseling is that it helps the debtor to establish an affordable payment plan to reduce his debts, without a bankruptcy record on his credit file.

The biggest benefit of a Chapter 7 bankruptcy is that it is quick and does not require the consumer to enter into a lengthy payment agreement.

The biggest benefit of a Chapter 13 bankruptcy is that it can offer both aspects: He can pay off most of his debt with an affordable payment plan, and then eliminate anything that remains.