Is Bankruptcy or Credit Counseling Better?

Deciding whether bankruptcy or credit counseling is the best course of action depends on an individual's debt. Bankruptcy remains the only option for people deeply in debt. Credit counseling is an option for those looking to climb out of debt without totally destroying their credit. Credit card companies sometimes work with individuals and lower interest rates and forego penalties to get the debt paid down.

Self-Service

Before heading down either the bankruptcy road or going to credit counseling, contact the credit card companies. Depending on a person's credit history with the company and the monthly amount payable to the creditor, some companies work to help reduce the debt. They do this by offering lower interest rates and eliminating late fees and penalties. Using this method first might eliminate having to file for bankruptcy or using a credit counselor.

Credit Counseling

Credit counseling offers some benefits. Credit counselors sit down with individuals and offer budget assistance. Since money mismanagement lands people in debt, understanding how to construct a budget and maintain a budget helps keep people from falling back into debt. In addition, credit counseling offers consumers a means of paying off their debts in one to five years. At the end of that time, credit begins rebuilding. Although credit counseling slightly lowers credit scores, bankruptcy lowers credit scores much more.

Bankruptcy

Individuals in debt should consider bankruptcy as a last option. Bankruptcy remains on credit reports for 10 years. This negative information impacts many areas of someone's life, including acquiring credit, renting vehicles, and even causes problems when seeking employment. A person files for bankruptcy only when all other avenues have been exhausted.

Bankruptcy Programs

Successful completion of a credit counseling program before filing for bankruptcy is mandatory, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In addition, successful completion of debt management counseling is required before bankruptcy discharge completion. The U.S. Trustee Programs maintains a list of approved programs and agencies. This process reduces the risk of people filing for bankruptcy from falling into debt again.

Preferences

Deciding to file for bankruptcy or to enroll in credit counseling remains an individual preference. Credit counseling offers the advantages of keeping credit scores higher and the moral satisfaction of honoring debt repayment, while filing for bankruptcy alleviates debt burdens too severe to handle. Since credit counselors offer bankruptcy as an option, consulting with one offers the chance to examine all aspects of both courses of action.