The airwaves are filled with ads touting debt settlement or debt negotiation, implying that is a better solution than bankruptcy. A credit counseling plan, also called debt consolidation, or debt management plan, typically work by a nonprofit agency (which is often funded by the credit card companies) getting your credit cards to agree to waive or substantially reduce the interest, and get you into an affordable payment plan with them. They will sit down with you and take a look at your budget, and if it can be worked out, particularly if you are of above means income and do not have a substantial amount of debt, that is sometimes not a bad way to go. I get a lot of referrals from these so-called credit counselors, when they realize that you cannot afford the payments.
I would recommend that you stay away from the for-profit credit counseling agencies. They are usually heavily front loaded with fees, (and ironically, often charge you more than double what a bankruptcy attorney will cost, even though they don’t have the same training nor are they held to the same standards as attorneys) and the first year or so of your payments are just going to them. Oftentimes, even though the creditors may have signed up originally, the creditors will drop out of those. I have had many, many clients who have come to me after spending a year or two with one of these outfits, only to have creditors drop out and end up suing them and garnishing their wages. People in that situation probably could’ve been helped out by me years before.
Worse yet are these so-called debt negotiation or debt settlement outfits. At first blush, they seem like a great idea — they save up your money, and then try to get the creditors to settle for a small portion of the balance owed. The problem is, the credit card companies quickly sniff out what is going on, and often react by promptly suing you. If it was that easy, you could do it on your own without hiring anybody. Also, if it was easy, I’d do that for my clients rather than filing their bankruptcy.
Keep in mind that these agencies are for-profit businesses, they are looking out for themselves, and they are not run by attorneys who are ethically bound to look out for you. Even if you can successfully settle your credit card for pennies on the dollar, the credit cards will often “1099” you, which means they will send you and the IRS a legal document, indicating that the debt that they charged off is taxable income to you. (The people that I talk to who have been through these debt settlement places were never told that). The fact is, debt settlement or credit counseling often fails, and is usually not going to put you in any better of a position with respect to your credit score than a bankruptcy would anyway.