If you currently find yourself struggling with debt and are considering Chapter 13 Bankruptcy protection, you may want to hold off. While Chapter 13 may be right for you, looking into all possible avenues is important. A bankruptcy stays on your credit report for years and makes it difficult to secure additional lines of credit, so if at all possible, using another option is typically recommended. Every situation needs to be handled on a case-by-case basis, and an ethical bankruptcy attorney will explore your options. Before moving forward with anything, understand the difference between Chapter 13 Bankruptcy protection and credit counseling.
Credit counseling creates an easy to read overview of your financial situation, including your income, debt, expenses and other assets. From there, different recommendations are provided. Credit counseling may also be required before you file for bankruptcy.
A credit counselor may recommend debt consolidation, which folds multiple loans into a single loan. The single loan usually has a reduced interest rate, saving you money and reducing the number of payments you must make every month. A similar arrangement can result from Chapter 13 bankruptcy, but there are key differences.
Chapter 13 does include some repayment options, which leaves you in better standing than other bankruptcy filings, but it still goes on your credit history. Negotiations and decisions occur in court and are legally binding under federal law.
Importantly, bankruptcy goes on your credit report. With credit counseling, this may be avoided as long as you make the agreed upon payments. However, if you negotiate a debt settlement through credit counseling – that is, agreeing with creditors to reduce the amount you owe, outside of the courts – that will be reported and will negatively affect your credit score.