Debt Counseling Vs. Bankruptcy

Mounting personal debt may have you reaching out for professional assistance. There are several options when it comes to debt management, but two of the most common solutions are debt counseling and bankruptcy. Before making a final decision on which route to take, you need to understand the significant differences between the two tough choices.

Definition

Personal bankruptcy is a court-administered program that allows you to discharge some of your debt and pay off the rest at a discounted rate. Debt counseling is a way to get advice on how to manage your debt, while also giving you access to programs that can allow you to negotiate your debt payoff amounts and consolidate your debt.

Differences

The most significant difference between debt counseling and bankruptcy is that bankruptcy is administered through the bankruptcy court system and can remain on your credit report for up to 10 years. Debt counseling is done through financial professionals and should only significantly impact your credit while you are enrolled in a debt management plan or similar program, according to money management experts on the Pier 55 website.

Considerations

A debt counselor can help you create a monthly budget, understand the areas of your spending that are causing problems and help put together a monthly plan to pay your bills and pay off debt. Debt counselors offer a service known as debt negotiation where they negotiate a discounted pay-off amount with your creditors and then get your creditors to agree to a monthly installment payment to satisfy the debt. With Chapter 7 bankruptcy, the courts decide how much of your debt is discharged and how much you have to pay back. In Chapter 7 bankruptcy, you may have to surrender your home and car as part of the court-ordered arrangement, according to debt expert Aleksandra Todorova on Smart Money's website. Both processes carry fees. A lawyer and court fees go along with a bankruptcy filing, and there are set-up and monthly administration fees for a debt counseling service.

Exploring Your Options

Debt counseling should be explored before deciding on bankruptcy. Because of the long-term nature and significant impacts of bankruptcy, it should be viewed as a last resort.