Can Credit Counseling Really Help?

After nearly six years of financial struggles, my husband and I are considering filing for bankruptcy. Even though we have tried in good faith to meet our obligations (which are survival debt, i.e. food, medical and utility bills) we are coming no closer to paying them off due to rising interest rates.

We now have 2 small children and the cost of childcare is greater than my income.

My concern is this: We have been current on all bills except we are 30 days late in our mortgage payment.

We have always paid our bills on time however our FICO score suffers due to the amount of debt we have (55K of unsecured) and an exception of lateness once with a student loan payment.

Do you have any thoughts on credit counseling versus simply filing for bankruptcy? We really need a fresh start and I am not sure that this can be obtained with credit counseling.

Also, we had planned to put our residence up for sale in a few months and move to a more affordable home. Is there a prayer of getting financed for a new mortgage while in credit counseling?

Our FICO scores are decent, and I have been told by several lenders that we could obtain a mortgage quickly out of bankruptcy at a rate of around 8%.

Please help with any advice that you can offer as to what is the best way to rebuild and move forward for people in our situation.

Wendy

I have been in your situation several times in my life, so I know how you feel. Fortunately I was able to avoid bankruptcy. Whether you can do so or not depends on your personal circumstances.

My first piece of advice would be to get and stay current on your mortgage. Your family needs a place to stay, food to eat and electricity and water. Everything else is secondary.

If you are going to sell your house anyway, do it now. The 2 ½ to 3 points in extra interest you would be charged after bankruptcy can add up depending on the amount you borrow.

Do the trade now, lock in the lower rates you’ll qualify for now and keep the mortgage out of bankruptcy, if you file. I think you will save thousands of dollars a year that way.

If you go into a rental temporarily, you could preserve whatever equity you have in the house or use the money to pay down debt.

I would get out a calculator and figure out if you job is worth keeping. If your childcare costs are greater than your income, it means, after tax, some of your husband’s income is being used for that purpose also.

Perhaps you will come out ahead, after tax, if you stay at home and take care of the kids yourself. Maybe you can still earn some income by working part time around your children’s at-home hours or working out of the home – starting a web site, for example.

Other than that, it depends on how much you are willing to work and sacrifice for the sake of your debt. It also depends if you have some moral ambivalence about bankruptcy.

Bankruptcy can be an enormous relief if it doesn’t put you on a guilt trip.

Under bankruptcy reform which came into effect last year, you have to go to credit counseling whether you like it or not. From what I’ve heard this mandatory 90 minute session, which costs $50, is not terribly helpful. It can be a group or telephone conference without any real relief other than bankruptcy being offered.

You really want true credit counseling and I would suggest a firm that’s a member of the National Foundation for Credit Counseling. There is a network of Consumer Credit Counseling Services throughout the US.

These firms are partially funded by the credit industry. These are also the only firms to date approved by the Department of Justice for pre-bankruptcy counseling.

These services have varying degrees of success in negotiating with creditors. If they can’t come up with a plan you can afford and that gets you out of debt in 5 years or so, bankruptcy might be the better choice.

Be careful of the fees charged and be aware of how your money will be handled. Read Credit Counseling for more information.

There are also many debt renegotiation firms out there which may be of more help if you want to avoid bankruptcy. If you do a internet search, you’ll find some.

These firms make grand promises, but you have to make sure they deliver. Get all the terms and conditions of the service in writing, if possible.

Make sure you know exactly what the service will cost and if it’s based on the amount of money they save you. Find out if you pay the creditors directly or if they get their hands on the money. If so, how do they handle it.

There have been some major scandals in this field. They involve firms pocketing the money you send them to pay your debts, paying debts late, only paying one debt at a time while letting others accumulate, etc. You can wind up in worse condition than before.

Other firms will just try to sell you debt consolidation loans.

Get references from the company and check them. Check the company out through the Better Business Bureau, not only the local branch in your city, but also online version.

Ask for recommendations if you have had any friends go through financial difficulties.

Do another net search on the name of the firm you are considering and see if any negative information turns up.

There have been books written that address the questions you ask. There is too much I don’t know about your finances for me to be absolutely positive any advice would be proper in your circumstances.

I think you should try to find a good credit counselor or debt renegotiation firm, find out what your options are and take it from there.

I hope I answered your questions and I wish you luck.

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