Using a debt consolidation company or a credit counseling agency can actually hurt your credit.

Edrie Pfeiffer
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Edrie Pfeiffer, Bankruptcy & Divorce Attorney

Over the years, I have met with many individuals who have tried using a debt consolidation company to assist them with reducing their monthly payments on credit cards and to pay off these debts. I have also had people come to me and ask if they should try using a debt consolidation program instead of filing for bankruptcy. My answer is always the same: “if you have the ability to pay your debts off in a three to five year period without using the money you need to live on, then you should do it”. However, there are some huge differences between bankruptcy and debt consolidation that you should be aware of. This article will go over most of those differences.

1) Debt consolidation attempts to work with your credit card debts to negotiate a repayment plan at a reduced interest rate and maybe a reduced balance. They do not work with other types of debts like medical debts, payday loans, car loans, tax debt or mortgage arrears. In contrast, bankruptcy will deal with all of your debts. If you do a Chapter 13 repayment plan, you will determine the amount that will be paid back to your creditors based on your financial situation. Unsecured creditors, like credit cards, medical debt, payday loans and even taxes, will not receive any interest on their balances.

2) Debt consolidation attempts to work out a payment plan that will pay the credit card debts in full and the payment plan can last for several years. In bankruptcy, you will either wipe out the credit card debt in a Chapter 7 bankruptcy or you will be in a Chapter 13 payment plan that deals with all of the debts for no longer than 60 months.

3) A debt consolidation program is voluntary for your creditors and they can opt-out at any time. I  had a couple who had participated in a debt consolidation program for over three years before they came to see me. Prior to entering the program, one of their creditors had obtained a judgment against them. The creditor agreed to participate in the debt consolidation program. My clients never missed a payment but one month the company that they were making their payments to messed up and did not send a payment to the creditor who had the judgment. The creditor immediately implemented a garnishment against my clients taking 25% of their take-home pay. After they came to see me, we filed a Chapter 13 bankruptcy which is not voluntary as to the creditors. The bankruptcy stopped the garnishment and they were able to pay off all their debts in less than five years. If they had come to see me three years earlier, they would have been able to be debt-free far sooner.

4) Your credit report will take a monthly hit while you are in the debt consolidation program. A credit report shows if you are paying your creditors according to the contract. If you are not paying according to the contract, your credit report will show that an account is delinquent according to the contract terms and every month it will show higher delinquency. Since the debt consolidation program is based on paying the creditors back at a lower interest rate and lower payment than the minimum monthly payment, every month the credit card companies will report that you are delinquent on your payments thus lowering your credit score. When you file a bankruptcy, your credit score will take a hit but then you can begin rebuilding your credit by making on-time payments immediately. Most of my clients see significant increases in their credit score within one to two years after having filed a bankruptcy.

5) Debt consolidation programs have a large number of fraudulent companies. When going into a debt consolidation program, you have to be very careful who you are working with. There are thousands of horror stories about individuals who have paid a debt consolidation company thousands of dollars and nothing was paid to their creditors. Bankruptcy is governed by Federal Law and any attorney who represents individuals in bankruptcies will be supervised by the Bankruptcy Court, the US Trustee, and the state bar.

There is a place for debt consolidation companies and there are some reputable companies. However, you must be very careful when considering one of these programs and make sure that it will meet your needs. Likewise, filing for bankruptcy should never be an easy decision but it can provide you with complete debt relief that is not available anywhere else.

If you are struggling with bills you cannot pay, contact Hampton Roads Legal Services at 757-276-6555, I will meet with you and discuss how bankruptcy can help you to become debt-free.