Bankruptcy Alternatives: Credit Counselling

Our first alternative to bankruptcy, a debt consolidation loan, required someone to lend you enough money to repay your debt. Often by the time people find this website, they are past the point where they will be approved for new credit – the solution of consolidating their debt simply isn’t available to them. Credit counselling is the next best thing and may be right for you.

What is credit counselling? Why haven’t I heard of it before?

Good questions. The reason you haven’t heard about it is because the service is provided by not-for-profit agencies that don’t have the resources to advertise their services.

If they could advertise, they would tell you that credit counselling is a voluntary program designed for people that can afford to repay 100% of the debt that they owe, but require relief from the interest and a simplified payment plan.

The way credit counselling works: all of your unsecured debts are pooled together (they aren’t actually paid off), the not-for-profit contacts them and offers a repayment plan that includes lower (or no interest) and a fixed term to deal with the debt. The most common term is 48 months, but they may extend to 60 in some cases.

Here’s an example: lets’ say you owe the same $40,000 we talked about in debt consolidations. In credit counselling, they prepare a Debt Management Program that offers your creditors around $850 a month for the next 4 years to repay the debt. The payments are made to the not-for-profit, who in turn sends each creditor their proportional share.

The advantages of credit counselling: lower interest, single monthly payment, usually a significantly lower payment than the amount you had to pay before the plan.

The disadvantages: credit counselling is not a legal procedure so it won’t stop a lawsuit or a wage garnishee. In addition, it only works for people that can afford to repay 100% of their debts. For many people the payment is still too high to solve their financial problems.

If it sounds like the payment will still be too high too high to help you, perhaps a proposal to creditors will work for you.

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