Counseling is a real option. It is not automatically the first stop just because you are behind.
Nonprofit credit counseling is a real option. It fits people who want lower rates, help with a budget, and a plan that keeps the accounts paying.
The usual advice is counseling, then a long settlement program, then Chapter 7, then settlement again if you only qualify for Chapter 13. That order assumes the only settlement product is a 24–48 month program. It is not.
A counseling agency proposes a payment to each creditor. If the creditor accepts, the interest rate often drops and the account often closes. The plan is commonly for five years. Monthly payments often land around 2% of the balance.
While you are in it, many creditors report a remark such as “account included in a debt management plan.” A lot of lenders will not finance you while that remark is there. Closing the cards can also hurt the score.
You can leave the plan early. The remark usually comes off after you do. If you stay the full term, credit recovery generally waits until the plan ends. See the recovery timeline.
When settling debts, new unsecured credit is often realistic within about two years after the enrolled accounts are settled. The old late marks can remain for seven years. A five-year counseling plan, assuming you stay in the plan, can mean about five years before new credit is realistic. A settlement finished in about 6 months — some sooner, some longer — starts that two-year clock much sooner.
A 24–48 month settlement program does not win that comparison. You are unpaid the whole time, lawsuit risk rises, and you still need to add about two years for credit recovery after the last account settles. If you cannot fund the settlements in months rather than years, a long settlement program is usually the worse option. See how unpaid accounts move through the collection cycle.
At about 2% a month, two years of counseling payments are roughly half the balance. Creditors sometimes settle around that level, and sometimes even less. Neither figure is a quote, and neither is a result we promise. A settlement finished in about 6 months, some sooner and some longer, can end the payments years before a five-year counseling plan.
If the accounts are only behind, not charged off, a re-age can bring them current without a five-year remark. See what is a Re-Age?. If they are already charged off, counseling often will not enroll them. Our Payment Plan or our Simultaneous Settlement service is the conversation then. See the settlement and payment plan options.
Credit recovery after Chapter 7 can be much faster. A typical Chapter 7 discharges in about four months. Most people can start rebuilding unsecured credit within about two years of discharge. FHA mortgage financing is generally available two years after discharge. A full five-year counseling plan is slower than that. Compare both before you enroll. See credit recovery after Chapter 7.
Counseling: current or recently late, you can afford the payment, and you want the accounts paid, not settled.
Simultaneous settlement: the accounts are delinquent and you can fund them together. About 6 months is typical. Some finish sooner. Some take longer.
Payment plan: the accounts are charged off, you cannot fund a settlement yet, you want to avoid bankruptcy, you want the smallest payment the collector will accept while you rebuild, and you can convert them to settlements in a reasonable amount of time. See the payment plan details.
In our opinion, a 24–48 month settlement program is not a viable option. You stay unpaid the whole time, and lawsuit risk rises while you wait. See why we do not offer it.
A counseling agency proposes a payment to each creditor. If the creditor accepts, the interest rate often drops and the account often closes. Plans commonly run five years, and many creditors report that the account is in a debt management plan.
It is better if you are current or recently late, you can afford the payment, and you want the accounts paid rather than settled. If you have a large unsecured debt load, settling quickly can be a better option. A 24–48 month settlement program is usually worse than both. See the simultaneous option.
Usually for as long as you are in the plan. Many lenders will not finance you while that remark is there. If you leave or complete the plan, the remark usually comes off.
Read our free 4-part educational series, or have Jared look over your accounts with you.