Credit Counseling versus Bankruptcy

A lot of people frequently want to know the difference between credit counseling and bankruptcy.  Chapter 7 and Chapter 11 bankruptcies are both essentially court-moderated repayment plans.  Credit counseling, likewise, is a way of reducing one’s debts and payments in order to make it possible for consumers to pay them off.

The most obvious difference, however, is that a bankruptcy prevents creditors from taking action against consumers while they’re repaying debt.  Credit counseling, however, relies on the cooperation of creditors in working with debtors to reduce payments to more affordable rates without being legally obligated to do so.  That means that if a creditor decides to file for a judgment against you, they can.

Credit Counseling Pros

In some states, like Texas, credit counseling is a mandated precursor to filing bankruptcy while in others, consumers must agree to attend credit counseling for a period of time after their bankruptcy is discharged.  Many wonder what the benefits of credit counseling are if creditors do not have to work with consumers.

For debtors, the greatest benefit is that credit counselors can often work with creditors to actually reduce debt whereas in a Chapter 11 or 13 filing, creditors may make a claim to the court for the full amount of the debt, which then has to be eventually paid by the consumer in respect to the court’s ruling.  It’s possible for one to actually pay less overall through credit counseling if creditors are cooperative.  For some people, paying off their debt is also a matter of pride.  It’s morally important for them to pay money that they owe to creditors.  However, they are going through a difficult time, financially.