For people who have high incomes relative to the amount of debt they are servicing, Credit Counseling can be a viable method of dealing with their debt. But, for most people, Credit Counseling does not work.
Most Credit Bureaus tell people that Credit Counseling has many drawbacks. One of these drawbacks is the negative effect it has on your Credit Report and your Credit Score. While you are in Credit Counseling, you continue to rack up late payments on your Credit Report. So, if the Credit Counselor doesn't pay the minimum payment on your accounts, those accounts will reflect late payments on your Credit Report. Moreover, if you don't pay the full balance owed on your accounts, those accounts will show on your Credit Report as not being paid in full. As a result, you may come out of Credit Counseling with a destroyed Credit Report and a Credit Score hundreds of points lower than when you started. As Experian states, Credit Counseling can be a very destructive course to take in dealing with credit problems.
In Chapter 13 Bankruptcy, on the other hand, negative reports on your accounts will stop once you file your Chapter 13 Case. Furthermore, your Credit Report and Credit Score will begin to rebuild while you are in your Chapter 13 Plan. Finally, the accounts will show a zero balance on your Credit Report.
What most people don't realize is that, in order for Credit Counseling to work, all of their Creditors have to agree to the Credit Counseling Plan formulated by the Credit Counselor. If even one Creditor refuses to accept the proposal, it can wreck the entire Credit Counseling Plan. For example, if one Creditor refuse to reduce the amount of their debt and/or the interest rate on the debt, they will frequently file a lawsuit rather than participate in the Credit Counseling Plan. At that point, in Ohio the Debtor will be faced with a garnishment of 25% of their wages, garnishments of their bank accounts, liens on their property and will usually be left without sufficient income to fund the Credit Counseling Plan.
When a Debtor has numerous Creditors, it is almost impossible to get them all to agree to a Credit Counseling Plan. As stated above, if even one Creditor refuses to accept the Credit Counselor's proposal, it can sink the entire process. When numerous Creditors are present, some of them will want to receive preferential treatment over the other Creditors which in turn leads to a competition or feeding frenzy among the Creditors.
In a Credit Counseling situation, even if a Creditor agrees to a delayed payment arrangement, they may still want to be paid in full and also demand interest even if it is less than the original rate of the loan. This can cause Credit Counseling Plans to last extended periods of time. Some as long as ten years or more.
If you miss a payment or your financial situation changes, Creditors will frequently back out of the Credit Counseling Plan and initiate a lawsuit. This can happen even if you have been in Credit Counseling for several years and paid significant amounts to your Creditor. In short, there is nothing stopping a Creditor from changing its mind and destroying all of the work and effort you put into Credit Counseling.
Credit Counseling doesn't work for mortgage loans and car loans. So, if you are behind on your house or car payments, you will lose those assets in Credit Counseling unless you have the financial ability to make a lump-sum payment to cure those defaults and the Creditor agrees to allow you to reinstate the loan. As Experian explains, this is one of the many drawbacks of Credit Counseling.
In Chapter 13 Bankruptcy, Creditors must accept your Plan if it complies with the Bankruptcy Code. This usually means your Creditors only get paid a small percentage of what they are owed. In most cases, Creditors are only paid one penny on the dollar over the life of your Chapter 13 Plan. This means that, if you owe $100,000.00 in unsecured debts like medical bills, credit cards, payday loans and the like, you will only payback a total of $1,000.00 to your unsecured creditors over the life of your plan. If you have less unsecured debt, you will pay back even less. Chapter 13 Plans last between 3 and 5 years and, at the end of the Plan, you get a discharge of all dischargeable unsecured debts that remain unpaid. Moreover, unless you have a solvent estate (i.e. you have more non-exempt assets than your liabilities) you don't pay interest on your unsecured debts.
In addition, even if you are behind on your house payments and/or car payments you can still save those assets in a Chapter 13 Bankruptcy Plan provided you have the income to fund the Plan. Moreover, you won't have to come up with a lump-sum payment to catch up the house payments and car payments. Instead, Chapter 13 Bankruptcy allows you to cure the mortgage and/or car arrearage over a 3 to 5 year period. Chapter 13 allows you to keep your cars and your home and smooth out the payments over the life of the Chapter 13 Plan. Something that isn't available in Credit Counseling. This article from Experian explains how Credit Counseling doesn't offer these benefits.