Bankruptcy vs. Credit Counseling: What's the Right Choice for You?
By FindLaw Staff | Legally reviewed by Bridget Molitor, J.D. | Last reviewed February 16, 2021
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Choosing Bankruptcy or Credit Counseling
A credit counseling agency may be the right choice if you have a steady income and feel your debt can be paid back in a few months to a year. If your debt is large and feels overwhelming, you may want to consider Chapter 7 or Chapter 13 bankruptcy.
Think of bankruptcy as a permanent dismissal of serious debt when nothing else has helped. Credit counseling will require you to repay all debts over time and is more of an educational push in the right direction.
What Is Credit Counseling?
For those deep in debt, credit counseling is a great way to solve bigger-picture financial questions while managing day-to-day cash flow challenges.
You will receive education from a certified credit counselor and learn about:
- Making a monthly payment to repay debt faster
- How to improve your credit report
- An overall debt repayment plan
- Budgeting to stay debt-free in the future
- Money management skills
- Credit repair tactics
Credit counselors operate through local offices, online, or via phone (or a combination of the three). To find one near you, contact your bank, credit union, or a consumer protection agency.
Military bases, housing authorities, universities, and credit unions usually offer free credit counseling. You can also contact the National Foundation for Credit Counseling (NFCC). This nonprofit organization helps provide consumer credit counseling referrals and services.
Be aware that many private credit and debt counseling organizations are classified as nonprofit, but that does not necessarily mean they offer free, affordable, or even legitimate services. Ask detailed questions if the company promises free services. In many cases, the services are "free" up front, but you pay later on.
Credit Counseling When Filing For Bankruptcy
People who plan to file for bankruptcy must get debt and credit-related financial counseling 180 days before filing.
In most cases, you will also attend bankruptcy counseling courses after filing bankruptcy. These courses focus on staying debt-free in the future.
Choosing Your Credit and Debt Counseling Organization
Legitimate, reputable credit counselors typically offer free credit counseling educational services. They can also provide advice on managing debt and developing a budget. Even if you choose counseling services for a specific issue, credit counselors will explore your entire financial situation.
Overall, they should help you come up with personalized, long-term solutions. The first consultation, which may be free of charge, typically lasts about an hour.
Avoiding Credit Counseling Scams
Debt counseling companies can be legitimate-looking scams. Never give credit card numbers or personal information until you are sure it is a legitimate business.
Be wary of companies trying to push you into debt settlement. This is not counseling, and it does not dismiss your debts. These companies will offer debt consolidation (negotiating with your creditors and rolling all your debts into one account) and "pay off" your medical or credit card debt. However, they will make you pay them back and charge high interest rates. In some cases, this can put you more in debt.
Some organizations are unwilling to provide free information about services until you submit details about your needs. This might indicate a fraudulent (or unprofessional) agency. You should do your research before committing to find a genuinely reputable counseling service.
The best way to avoid scams is to work with your bank or credit union and use the reputable business they recommend. After compiling a list of organizations, reference them with your local consumer protection agency and the Better Business Bureau and then ask them a few key questions.
What to Ask Before Choosing a Credit Counseling Organization
Not all consumer counseling services are created equal. The least reputable ones can actually worsen your financial goals. To make an informed decision, you should ask the following questions before choosing one:
- What services do you offer? Steer clear of organizations that insist on debt management programs or debt management plans (DMPs) before they have had a chance to review your finances. Look for organizations offering debt management classes and budget counseling.
- Is there a charge for educational materials? What other information do you offer? Organizations that charge for general information often are not reputable.
- Will you help me come up with a plan for my overall financial situation, in addition to solving my specific issue? What are your fees? Whatever they say – get it in writing. It is easy for staff to say anything and then hand you a different contract later. Save yourself time and money by getting their contract and approach right away in writing.
- Are there payment options if I can't afford your fees? Organizations that turn people away for lack of funds often are not reputable.
- Will I sign a formal, written contract for your services? Only sign documents that you have read and fully understand. Get all verbal offers and agreements in writing.
- Do you have a license to offer your services in my state? Are your counselors accredited or certified by an outside organization? If not, what is your training policy? It's best to choose an organization whose counselors are trained by a third party.
- How do I know my personal information (such as birth date, address, and Social Security number) will be kept confidential? How do you compensate your employees? Do they get paid more if I agree to certain services, pay a fee, or contribute to your organization? A "yes" answer to any of these means your best interests may be compromised.
When to Hire an Experienced Bankruptcy Attorney
When financial problems become severe enough to stress your personal and family life, it may be time to take legal action that might improve the situation. If you are considering bankruptcy instead of debt counseling, you can have a free consultation with an attorney, and they will guide you through the process. Find a bankruptcy and debt attorney or law firm to help you resolve your debt situation.
If you would like to start with a credit counseling service as your debt relief option, you do not need an attorney to start the process. If the company seems like a scam, they steal your personal information, or there is a contract issue, you will want an attorney to step in.
Meeting with an attorney to discuss your situation and explore your legal options is the best way to ensure the most favorable outcome — personally and financially — for your situation.