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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 37841
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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which is less crushing to my credit - Credit Counseling or

Customer Question

which is less crushing to my credit - Credit Counseling or Chapter 13?
Submitted: 7 years ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 7 years ago.

Credit counseling presumably has no effect on your credit (although there are a number of urban legends about the credit reporting agencies receiving info that a person is using a credit counseling agency, which is not expressly disclosed on the credit report -- I have no knowledge of the truth or falsity of this issue).


What does have an effect is that if a creditor agrees to a substitute payment plan or a release of some portion of the debt (legally known as a "bilateral executory accord"), then it may "charge off" that portion and that will show up on the credit report.


My experience is that the "first cut is the deepest," and that the FICO credit scoring model will reduce a person's credit score by at least 100 points for any negative entry, no matter how minor. Once this occurs, the person's credit is already in the unfavorable zone, so nothing else really matters.


In short, your credit report is either perfect or not, and the only thing that really affects you score is once it's perfect, the amount of credit you have, length of history, number of creditors, etc., may make your score higher. But, until your credit is at least 720, lenders all look at you skeptically, so there's no difference.


That said, the cost of credit counseling is typically as expensive as bankruptcy, assuming no extenuating issues (e.g., fraud allegation, etc.). So, in my view bankruptcy gets it over and done with and lets you move on -- and everything else is just delaying the inevitable.


Hope this helps.


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