Credit Reports & Bankruptcy
Vs.
Debt Management

• Using a debt counseling service goes against you in the eyes of a potential creditor. Is this true?

If you fall into bankruptcy, you have a "fair" chance of catching a potential creditor's attention in a less than favorable light. Similarly if the credit is already damaged by late payments or worse, this too will be noted by a potential creditor. In either case the net affect of using credit counseling is nil.

But additionally, creditors classify debtors based on a risk or FICO score that has many contributing elements. The risk score may or may not be affected by credit counseling and could be affected positively or negatively depending on the potential creditor.

Similarly, many credit counseling agencies do not report counseling to the credit bureau. But whether they do or don't report is a good question to ask when sizing up an agency. On the other hand, creditors themselves and not the counseling agency are the ones who often report that an account is being paid through a debt management plan. It all depends on the office policy of each entity.

• When is bankruptcy the best course of action and what are the differences in impact between credit management steps and bankruptcy?

Deciding any debt management plan v/s bankruptcy is very difficult to answer because there are so many factors to consider which are often dictated by external circumstances.

In theory, bankruptcy is to be used by people who are absolutely unable to repay their debts.

In reality, we know that this is not always the case. But there are very important circumstance to think about.

For example the individual should ask themselves :-

• Is this a permanent or temporary problem ?

  Let's say someone has become permanently disabled and unable to make enough money to cover more than their monthly living expenses, let alone debt. Their disability will not change and there's no chance of making more money. Bankruptcy may be their only alternative. In a case where a person has fallen behind with creditors but who is making a reasonable income with the possibility of promotions, etc., bankruptcy may not be the option to take.

The differences between the two :-

• On a debt management plan, you repay creditors 100% of what is owed with the exception of interest concessions the companies may or may not make. Under Bankruptcy Chapter 13 you pay so many cents on the dollar. Under Bankruptcy Chapter 7 your debts are forgiven with some exceptions.
• On a debt management plan, you do not lose any assets. Under bankruptcy you may.
• On a debt management plan, many creditors will consider granting a person credit once they graduate from the program. With bankruptcy, you may be able to get credit but it may be much more difficult and you could pay much higher interest rates.
• On a debt management plan, creditors may report your accounts as "slow pay" or "not paying as agreed". Some creditors will actually bring the accounts current and a person's credit looks better than it did before. The information reported by creditors stays on your credit report for 7 years. With bankruptcy, it shows as a bankruptcy and stays on your report for 10 years.
• A debt management plan cannot stop legal action by a creditor. Payment arrangements can be made, however, in many cases. Bankruptcy does stop legal action.
• There are things a debt management plan can help people with that bankruptcy will not (i.e. loans from family members and more).
• Debt management plans are designed to be an "alternative to bankruptcy" for those who have some ability to pay. Bankruptcy was not designed to be an "alternative to repayment."

NOTE: There is ongoing legislation to severely limit the ability to file bankruptcy in cases where people have the ability to pay. No one really knows where or when this will end.