Bankruptcy is Better Than Credit Counseling
It is not common to hear that “credit counseling is a s bad as bankruptcy” or that “credit counseling is as bad as Chapter 13 bankruptcy.” Neither of these statements is true.
A Bankruptcy filing is the single worst thing you can do to your credit score. It is noted and affects your credit score. By contrast, credit counseling does not affect your FICO score! It is treated as a neutral factor that neither helps nor hurts your score.
Credit Counselors specialize in negotiating lower interest rates and working out payment plans for debtors who might otherwise file for bankruptcy. Although credit counselors can consolidate the consumer’s bills into one monthly payment they don’t offer loans or promise to eliminate or settle debts.
However this does not mean that enrolling in a credit counselor’s debt management plan will help your credit all. There are a lot of problems associated with this plan of attack.
For instance, some lenders will report you late with a payment or give a negative comment to the credit bureau if they even notice you enrolling a debt management plan. The reason lenders do this is to punish you for not paying the entire amount owed.
Also not all credit counselors are created equal and some have been accused of withholding consumer payments that were intended to be paid to the creditors. These missing payments can also show up as late or missing payments on the consumer’s credit reports and hurt their scores.
Another thing to note is that some lenders – most notably mortgage lenders – do view participation in a credit-counseling program as the equivalent of a Chapter 13 bankruptcy. It does not matter if they are wrong or right about this or even if it is legal! It is how they perceive it. If they see it mentioned on a credit report they won’t extend credit as long as the notation of the credit counseling remains on the file. Typically however, such notations are dropped the month following the completion of the repayment plan.
By contrast a Chapter 13 bankruptcy MUST remain on your credit file for seven years or more and a Chapter 7 bankruptcy, which is a complete negation of debt stays on your record for ten years.