Bankruptcy Alternative - Credit/Debt Counseling Services

Many people who are considering bankruptcy want to know if there are bankruptcy alternatives. The answer is yes! One alternative is credit counseling or debt counseling.

Many of the credit/debt counseling services will contact creditors and work out a payment plan with the creditors on behalf of the debtor. Sometimes, these plans include reducing, eliminating, or suspending interest while payments are being made. Generally, the plans require that the debtor pay the counseling service each month and then the counseling service sends the money to the debtor's various creditors. It works similar to a Chapter 13 bankruptcy, but it is not court ordered and creditors do not have to go along with the plan.

Some counseling services do not charge debtors a fee. Their services are "free". However, they must be paid and some of them receive money from creditors. Therefore, they may not be as "independent" as a person might think.

What are the advantages of a counseling service?

    - Counseling services will contact creditors so that a debtor does not have to contact the creditors.

    - Creditors which agree to the proposed plan will stop contacting the debtor.

    - Payments to creditors, which agree to the proposed plan, will be easier, and, often, less per month because of less interest charged, a lower monthly payment negotiated, and because payments are paid to the counseling service which then pays the creditors.

    - When the payment plan is completed, a debtor's debts will be paid and eliminated.

    - The debtor avoids bankruptcy.

What are the disadvantages of a counseling service?

    - Sometimes, a payment plan is just too difficult to keep up with. A counseling service may persuade a debtor to pay more than the debtor can reasonably pay and the debtor may skip other monthly payments (such as a mortgage payment) to keep up. If a debtor cannot keep up and eventually has to file bankruptcy anyway, then the money paid to the creditors under the plan is wasted.

    - A payment plan is voluntary by creditors and a debtor cannot force them to go along with the plan. One creditor can cause the plan not to work.

    - Proposed plans by a counseling service do not include two aspects of a Chapter 13 bankruptcy which help people facing foreclosure. The do not include an "automatic stay" of civil legal actions and they do not require mortgage lenders to give debtors time to pay a mortgage arrearage over time.

    - Finally, some creditors view a counseling plan the same way they do a bankruptcy.

This is general information. If you need specific information or have any questions of any nature whatsoever, talk with a lawyer licensed in your state.

For more general information, see Bankruptcy. For more detailed information see bankruptcy alternatives.

You may republish this article as long as the wording is not changed and all links remain active.