When filing for either Chapter 7 or Chapter 13 bankruptcy, you will need to participate in credit counseling. It is important to remember that not all credit agencies are approved by the U.S. Justice Department to administer bankruptcy credit counseling. A list of approved credit counselors is available.
You may want to consider credit counseling prior to any bankruptcy actions to see if there are any other options that may be available to you. You will want to make sure that any credit counselor that you consult with is certified and licensed by your state. For a list of credit counselors, click on one of the following:
- National Foundation for Credit Counseling
- Association of Independent Consumer Credit Counseling Agencies
What should you look for in a credit counselor?
A credit counselor should be able to:
- Give you advice on how to manage your money and debts.
- Give you information regarding budgeting.
- Attempt to negotiate lower interest rates with your creditors.
Should you consider debt consolidation?
Many credit counselors advertise help with debt consolidation. By consolidating your debts, you will be able to combine all of your debts into one monthly payment. You will pay your monthly payment to the credit counseling agency, which will in turn, pay your creditors. The credit counselor may be able to negotiate late fees with your creditors.
You will be expected to stop applying for additional credit or incurring additional debt for the duration of your debt repayment. You are encouraged to investigate any fees the credit counselor may charge and read the fine print to make sure that your monthly payments are, in fact, going toward the repayment of your debts, rather than to the credit counselor.
There may be tax consequences if any of your debts are forgiven as part of the debt consolidation process. You should report any debt forgiveness on your tax return during the tax year that the debt was forgiven. Failing to do so could mean amending your return at a later date and possibly subject you to fines and penalties for underpayment of taxes. Even if the lender has not sent you an IRS Form 1099-C, Cancellation of Debt, you will still need to report the forgiven debt. It is important to note that you also may be liable for state income tax on this amount as well.
How does credit counseling affect your credit score?
Some creditors will report any late payments to the credit bureaus, even if you have entered credit counseling. Other creditors may view enrolling in a credit-counseling program as a positive step in repaying your outstanding debt.