Is Using a Credit Service Like Filing Bankruptcy?

Going to a credit counseling service used to have the stigma of being used by people in bankruptcy or close to financial ruin. Some kinds of credit services are often used as an alternative to bankruptcy and can have a similar impact on credit scores, but anything is better than actually filing for bankruptcy. As long as you pay your lenders in full, credit counseling may not be a bad idea.

Considerations

All credit services are not like filing for bankruptcy. There are several types of credit services, and only some of them affect credit standing or creditworthiness. Counseling services do not appear on a credit report and are used by people in all kinds of financial situations. Credit counseling, however, is required of anyone about to file for bankruptcy. Sometimes people need credit services for credit education. One-third of all participants in a counseling service get control of their finances after a single session, according to MSN Money Central.

Debt Settlement

Credit services that involve debt settlement are like filing for bankruptcy. When a borrower goes to a debt settlement company, he usually has little option other than to file for bankruptcy or try to negotiate repayment of the debt for part of the original balance. Usually, the creditor reports balances as settled for less than the amount owed, something that will make future lenders nervous just as much as bankruptcy.

Do I Need a Credit Service?

Quite often people are so far in debt or have extraneous factors, such as alcoholism or a gambling problem, that no amount of credit counseling or debt management can prevent them from filing for bankruptcy. Sometimes a credit service will just delay the inevitable. Bankruptcy can be the best alternative to decades of living paycheck to paycheck, especially if you qualify to discharge unsecured debt (where the courts absolve you of all liability to repay the debt) under Chapter 7 bankruptcy. Also, it is possible to gain credit again a few years after bankruptcy.

Tip

Before signing up for any credit service, find out if you can afford the fees and if the company is accredited by the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. The fees for a debt settlement company can be thousands of dollars and cause just as much stress as your outstanding debt. Also, any legitimate credit counselor will explore every avenue rather than pushing you toward a debt management or settlement plan.