Where do you draw the line between credit counseling and bankruptcy?
January 29th, 2010 | 
Author: tammie asked:
You know you need to do something but when do you choose credit couseling and when do you chose bankruptcy?
bankruptcy
tammie asked:
You know you need to do something but when do you choose credit couseling and when do you chose bankruptcy?
bankruptcy
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bankruptcy
My understanding from talking to a bank about a home equity loan is that banks view credit counseling and bankruptcy as very similar, negative things in your credit history. You want to avoid both of these at all costs. I know from experience it’s difficult, but try to downsize, sell your home, car, or other things you might have payments on. Maybe look at temporarily getting a second job, but try not to do either of these options, as they will affect your credit for some time.
bankruptcy
When your obligations (your debts) are more than your income. Most credit counseling agencies will not even help you beyond preparing a budget if your income is in the red.
On the other hand, just having negative income is not a good enough reason to declare bankruptcy. There are plenty of things you can do to reduce your debt.
Have you considered a debt consolidation loan? (Be careful here to really make sure you are getting a good deal.)
Have you asked your creditors to reduce your interest rate? (Believe it or not, many will just by asking!)
Have you looked at reducing expenses? (Eliminate cable, high speed internet and food from your life. Okay, I’m joking about food, but you must sacrifice in meager times.)
Have you looked at getting a second job? (Often, just a few hours a week extra is all that is needed to make up the difference.)
Have you looked at reducing 401(k) payments temporarily? (Doesn’t make sense to keep paying into an account you will not see for possibly decades if it is driving you into bankruptcy today.)
Anyway, a credit couselor can give you tons of advice on how to reduce or eliminate expenses – even if they cannot help you because you have a negative income. And, under the new bankruptcy laws, you have to see a credit counselor BEFORE you file for bankruptcy and get a certificate of attendance to the court.
Evidently, the credit counseling lobby is more powerful than I had originally anticipated.
Hope this helps!
P.S. Credit counseling is not seen as a bad thing. Most creditors like to see credit counseling – it shows you are trying to take care of your debt and not just write it off. If you MUST file bankruptcy, consider a Chapter 13 (where you make structured payments to the court and pay your debt down) as opposed to a Chapter 7 (where you write off your debt). A Chapter 7 stays on your credit for 10 years, and nothing makes a creditor more leary than seeing someone borrow money and saying Scr#w you!. If you file a Chapter 13 and make the payments, it can actually be a very good thing to your credit. Again, it shows you are taking responsibility for you actions, and soon creditors will be extending credit offers to you again. Just be sure to use the offers wisely!