Credit Counseling or Bankruptcy?

As a mortgage professional, clients often call to ask about whether or not they should file bankruptcy or call one of the "non-profit" credit counseling agencies that advertise on late-night television.

There is no simple answer to this question.

If you ask a credit counseling company (a.k.a. "debt negotiation company"), they will surely say that credit counseling is superior and if you ask a lawyer, he or she will say that filing bankruptcy is the better choice.

I operate a mortgage company and I am not in either business. However, I can tell you what the difference is between the two and hopefully you will come to the best conclusion yourself.

With consumers, there are basically two types of bankruptcies:

1. A Chapter 7 bankruptcy is when the bankruptcy court discharges all of your debt completely.

This means that every debt that you choose to put into bankruptcy will be eliminated. If you put your car payment in your bankruptcy, you will have to give your car back. If you choose not to include your car in your discharged debts, you can keep your car, but you keep the car loan also.

2. A Chapter 13 bankruptcy is when your bankruptcy court decides that you have the ability to pay your debts and they offer you a payment plan.

In other words, a Chapter 13 bankruptcy doesn't eliminate your debt, it just allows you to pay it back in smaller, more affordable installments.

The biggest misconception that people have is that credit counseling is better than bankruptcy, as far as credit goes.

This is absolutely not true.

When you enter an agreement with a credit counseling company, you get a label on your credit report that says, "In Credit Counseling." And from the perspective of a creditor, this is no different from being in bankruptcy.

When you are in credit counseling, you will not be able to obtain an Arizona mortgage.

Here is the bottom line: If you have more debt than you can handle, see if you qualify for a Chapter 7 bankruptcy.

If you can completely wipe-out your debt, I suggest you consider paying a lawyer and filing Chapter 7 bankruptcy. If you are so deep that you actually qualify for the Chapter 7, based upon the "means test," It's definitely worth the money.

Typically, Arizona lawyers charge between $800 - $2000 for a Chapter 7 filing. However, if you are wiping out tens of thousands in debt, the cost of a bankruptcy attorney is almost insignificant.

However, if you can only qualify for a Chapter 13 bankruptcy, then you might as well call a credit negotiation company and have them negotiate with your creditors for you.

It's going to affect your credit the exact same way that a bankruptcy would, except you will only pay a couple of hundred dollars for credit counseling.

There is no reason to pay an attorney for a Chapter 13 bankruptcy if you can get the same results from credit counseling.

Bottom line: If you can qualify for a Chapter 7 BK, you should probably do it. If you can only qualify for a Chapter 13, forget the bankruptcy and Google the term "credit negotiation help."