Bankruptcy vs. Credit Counseling: What's The Difference?

People treading the heavy waters of financial distress, are often confused by the options available and just what they mean. One of the biggest misunderstandings is that credit counseling is equal to bankruptcy. This is not true, at all. The only similarity between the two is that Chapter 13 bankruptcy is a repayment plan.

Credit counseling is also a repayment plan, an option chosen by you, and negotiated on your behalf by professional counselors. It enables your creditors to completely recoup all the monies they are owed. Counseling is not forced on you by anyone. It is a viable alternative to the more drastic choice of declaring bankruptcy.

Legal liability for your debts remains with you, and therefore you retain more control of how your credit standing will be affected. We believe credit counseling is the best choice.

There are two types of bankruptcy that are available for most individuals. These are Chapter 13 bankruptcy and Chapter 7 bankruptcy. Chapter 13 bankruptcy, also called “reorganization” allows the person to keep property, which they may otherwise lose, such as a mortgaged house or a car that was obtained through a loan. With reorganization, the debtor can pay off their debts over a period of three to five years, rather than surrendering the property. Chapter 7 bankruptcy is known as “straight bankruptcy”, which means that it involves the liquidation of all assets except those that are exempt under your state’s laws. These exempt items may include such things as the home you live in or items essential to your work. Chapter 7 bankruptcy can only be filed once every six years.

Bankruptcy is often the only way to avoid foreclosures, repossessions, garnishments, utility shutoffs, and other debt collection activities and still maintain many of your assets (depending on your state’s exemptions). It can not clean up a bad credit record and will in fact negatively affect your credit rating for up to ten years. It also can not exempt you from paying child support, alimony, legal fees, court fines, taxes and some student loans. Also, in order to qualify for Chapter 13 bankruptcy you must have a plan to catch up on your debt.

You must file bankruptcy in a federal court and the fee is $160 (which may sometimes be paid in installments.). You should also hire a bankruptcy lawyer. There are some free public legal services that may handle a bankruptcy case for those who qualify or who may be able to provide referrals for private bankruptcy lawyers. Keep in mind that unless you are getting free legal services through some sort of program, an attorney could cost around $1,500 just to prepare the paperwork.

Bankruptcy is not something to be taken lightly. Therefore you should look into other methods of working out your financial problems first. You may want to seek credit counseling or other services first. Try contacting the creditors that you owe money to and seeing if you can work something out with them first. Also, you may want to check and see if you qualify for any sort of state aid before taking this drastic step.