Credit counseling is a useful tool for many people struggling with debt, but it is not always the best solution. It may not help if your debt is too large to be repaid within a reasonable time, your income is insufficient to cover even reduced payments, or your financial hardship is long-term and unlikely to improve.
One major limitation of credit counseling is that most agencies focus on Debt Management Plans (DMPs), which primarily help with unsecured debts like credit cards but do not address secured debts such as mortgages and car loans. If you’re behind on these secured loans, credit counseling alone may not prevent foreclosure or repossession. Additionally, DMPs require you to make consistent payments for several years—if your income is unstable or insufficient, maintaining the plan may not be realistic.
Bankruptcy may be a better option than credit counseling if:
- You have overwhelming debt with no realistic way to repay it, even with reduced interest rates.
- Creditors are suing you, garnishing your wages, or threatening foreclosure.
- You have significant medical bills, tax debt, or other obligations that cannot be easily managed through a DMP.
- You need immediate relief from collections, as bankruptcy triggers an automatic stay, stopping creditor actions.
However, bankruptcy has long-term consequences, such as severely impacting your credit score for up to 10 years (for Chapter 7). It can also make it harder to qualify for loans, rent housing, or obtain certain jobs in the future. But in cases where debt is truly unmanageable, bankruptcy provides a fresh start by either discharging (eliminating) most debts (Chapter 7) or creating a court-approved repayment plan (Chapter 13).
If you’re unsure whether credit counseling or bankruptcy is the better route, speaking with both a certified credit counselor and a bankruptcy attorney can help you weigh your options based on your specific financial situation.
