Credit Counseling Instead of Bankruptcy

Getting the help of a neutral party in assessing a financial situation, advising on budgeting and spending practices, and negotiating with creditors can be instrumental in getting someone back on their feet financially without going through bankruptcy. This kind of help is known as credit counseling.

Anyone considering filing for Chapter 13 or Chapter 7 bankruptcy is required by law to receive credit counseling from an approved agency prior to filing for bankruptcy. But credit counseling can also be helpful to people who don’t want to file bankruptcy as well. Credit counseling offers a number of advantages, including the following:

  • Less costly -- especially when working with a non-profit agency

  • No stigma or feelings of guilt that sometimes accompany bankruptcy

  • Pay off debts rather than discharge them

  • Is only on credit report as long as counseling program lasts rather than the 10 years bankruptcy is on your report

  • Make one monthly payment that is lower than the total of all debt payments combined (in most cases)

  • More leverage in negotiating with creditors than trying to negotiate on your own

  • Accurate assessment of financial picture to confirm or correct your assessment

  • Receive a workable plan based on your capability

  • Remove emotional element from many decisions regarding debt and finances

How Debt Counseling Works

Thee first thing a credit counselor will do is review your financial documents, including debts, bills, assets and income and assess your situation. Then the counselor will make recommendations about how to resolve your debt issues. This could be as simple as eliminating unnecessary expenses, creating a budget and sticking to it. Or it could involve negotiating with creditors to reduce your total monthly payments. In some cases the counselor may recommend bankruptcy.

Most credit counseling programs that don’t go to bankruptcy involve the counselor negotiating with creditors. When this occurs, the agency usually requires that the debtor make a single payment to the agency, and then the agency distributes payments to creditors. The goal of a plan like this is to get the debt paid off -- or at least paid down to a manageable level -- within three to five years. Often creditors are willing to be more flexible with a credit counseling agency than an individual debtor. However, the same or better negotiating power is available by working with a bankruptcy and debt solutions attorney.

One disadvantage of working with a credit counseling agency is that not all agencies work with all creditors. Some agencies only work with creditors who agree to pay the agency, which is how the agencies fund services rendered to debtors. Creditors may also refuse to work with an agency for some other reason as well. Creditors who don’t agree to work with the agency will continue to try to collect on the debt directly from the debtor. This can result in lawsuits, judgments, repossessions and other actions even though the debtor is enrolled in a credit counseling program.

Finding a Reliable Credit Counseling Agency

Anyone who asks around enough will eventually hear that credit counseling is really a scam. Unfortunately, there are many privately owned credit counseling firms whose services really are tantamount to a scam. With a private firm, the whole first year of payments may go directly to the firm rather than to creditors. During this time, many creditors may drop from the program and begin collection efforts against the debtor again. Victims of these operations frequently report going through a year or more of payments only to find out no payments were made to creditors and now they’re facing a lawsuit or repossession or foreclosure.

To avoid being victimized like this, look for the following in a credit counseling agency:

  • Non-profit -- ask for proof
  • Affiliated with the NFCC or similar national organization
  • Accredited by the Council on Accreditation
  • Setup or monthly fees are $25 to $50, not higher
  • Counselors are certified credit counselors
  • Spend at least an hour with you in the initial counseling session in order to fully understand your financial and debt situations
  • Willing to waive fees for true hardship cases
  • No minimum amount of debt required
  • Offer options and a customized repayment plan
  • Agency is bonded and insured -- ask for proof
  • Good standing with the Better Business Bureau -- check it yourself
  • Willing to work with all creditors, not just the ones that pay the agency a fee
  • The credit agency should not be paid by the creditors in your case as this causes a conflict of interest on their part

Getting Help with Credit Counseling and Creditor Negotiations

Using the above criteria, most debtors should be able to find a reputable and reliable credit counseling agency who can be truly beneficial. However, anyone who has trouble finding a reliable credit counseling agency or wants to make sure the agency they choose is honest and reliable may want to seek out an experienced bankruptcy and debt solutions attorney. An attorney can vet an agency for a debtor or provide many of the same function. Bankruptcy and debt solutions attorneys are also held to a higher standard of professionalism and responsibility than most credit counselors.

In Maryland, bankruptcy and debt solutions attorney John D. Burns and his firm can assist in finding quality agencies to provide credit counseling. We can also advise you on whether to follow a credit counselor’s recommendation or file for bankruptcy, negotiate with creditors on your behalf, or help you with any other bankruptcy or debt solutions need. Call our office at 301-441-8780 to schedule an appointment or e-mail us at