Credit Counseling

1. You are required to have a "credit counseling" class before filing bankruptcy.  But this is an evaluation to determine whether you should file bankruptcy.  Debt Management, sometimes called Credit Counseling, is the answer for some situations. But did you ever wonder what were the drawbacks to Debt Management agencies? 

    

   Well here are some:

    

   1. When you pay Credit Cards through a credit counseling agency Debt Management plan, the banks turn in a 1099. You are taxed as income for the amount of the debt you are forgiven.  If your debt is discharged in a bankruptcy there is no tax consequences!

   2. Over 90% of credit counseling agency plans fail. People rarely complete the credit counseling plans. Often, half or more of the money paid is kept by the Debt agency.  In a Chapter 13, if you make most of your payments and can't finish, you may get a hardship discharge.  But if you don't make all of the Credit Counseling payments you still owe it all. Many people find themselves unable to finish credit counseling plan payments, their credit is trashed and their time wasted. With credit counseling agency plans you must complete all of the payments ... on time or their plans fail.  You can convert a Chapter 13 to a Chapter 7 if a Chapter 13 does not work. 

   3. Although Credit counseling agencies promise that they can force credit card companies to settle accounts for pennies on the dollar.  The truth is that no credit counseling agency can force banks to accept 50 cents on the dollar.  In some states, credit card companies can accept credit counseling payments and still sue for the complete amount later.  These states have no accord and satisfaction rules.  Only bankruptcy court can force banks to take pennies on the dollar and many bankruptcy plans offer 10% or less on the dollar. Credit counseling agencies and Debt Management plans can't do that.

   4. Some Credit Counseling agencies have taken payments from customers and then filed bankruptcy themselves. (see the 2004 story on Ameridebt and the FTC investigation of the industry on the FTC website.) Credit Counseling agencies pay themselves from what you pay them.  Credit counseling agencies often take up to 50% of what you pay them as a "fee."   This has left thousands of people still in debt and their money taken.

   5. Credit Counselors often advise people that by paying 50% of what you owe that you can "repair your credit record".  If you partially repay your debts your credit will be just as bad as if you had filed bankruptcy.  Both credit counseling plans and bankruptcy are rated as an I-9 unpaid charge off on your credit file.

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