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How Credit Counseling Can Help You Avoid Bankruptcy

With more and more Americans struggling with mortgage and credit card debt, bankruptcy may seem inevitable in many cases. However, you should seek to avoid bankruptcy if at all possible because it has lasting consequences. A less onerous debt relief option may be credit counseling.

Broadly speaking, credit counseling is an examination of your financial situation--assets, income, and debts--and a plan for resolving your debts. The goal is to help you understand your debt relief options and avoid bankruptcy.

Choose a credit counselor carefully. Make sure the organization has a reputable presence in your community, and ask for written disclosure of any fees or financial incentives the credit counselor has. Some organizations offer credit counseling for free, but just make sure you know and trust who you are dealing with before you get started.

What Credit Counseling Can Do For You

Credit counseling offers several forms of debt help, including:

  • An examination of your current debt burden, and advice on how to resolve it
  • Education on budgeting and how to get a handle on your spending habits
  • Explanations of less expensive forms of borrowing
  • Information on your credit score, and what steps you can take to improve it
  • Help working with creditors to reduce or restructure the interest rates your paying on your existing debts

Credit counseling can help provide debt relief for your current situation, but just as importantly can teach you how to better manage your finances in the future to avoid debt problems.  Unlike a debt settlement program or bankruptcy, consumer credit counseling does not generally eliminate the debt you owe, rather it helps you pay down the debt you owe.

Debt Management Plan

At the start of a credit counseling program, a credit counselor may recommend a debt management plan. Under a debt management plan, you make monthly payments to the credit counselor, who uses those payments to selectively pay down your unsecured debt. Unsecured debt includes credit card debt and any other debt not backed by collateral. The credit counseling will likely use your payments to first payday your “worst” debt, those with the highest interest rates.  However, besides organizing your debt payments and making sure those payments go where they are needed the most, a debt management plan may involve negotiating with creditors for better terms, such as lower interest rates.

A debt management plan involves giving up a certain amount of control, so before entering into one it is especially important that you trust your credit counseling organization and understand what financial incentives they have, if any. On the positive side, a debt management plan can create some of the debt relief structure of bankruptcy, without the long-term consequences.

What Credit Counseling Can't Do

In short, credit counseling can give you financial advice to help you avoid bankruptcy, or even give you a more active form of debt help through a debt management plan

There are, however, two important things credit counseling can't do:

  • It won't make your debts magically go away. Credit counselors do not have the authority of bankruptcy courts, so they rely on the cooperation of your creditors.
  • They cannot change your habits for you--this depends on you.

Ultimately, credit counseling is a debt relief option you should certainly explore before bankruptcy. In fact, consider credit counseling as soon as you suspect that your debts might be getting out of hand, because the earlier you seek help, the more credit counseling can do for you.



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