We’ve Been to Credit Counseling But Should We File For Bankruptcy?

Dear Steve

Hi! I am a piano teacher, and due to the bad economy have very few students, even though I am used to having plenty.

We just moved because we could no longer afford where we lived. We gave up our house in a deed in lieu of foreclosure. My husband took a cut in pay.

We owe about $400 per month on credit cards and owe a total of about $12,000. I also owe about $22,000 in student loans. Those will start next month, increasing our $400 to $620 or so with the loans. We barely have enough money at the end of the month to pay rent and other living expenses.

We make roughly $1,500 a month. This is not good. We have talked to credit counseling, and they have us paying about $320 to them and they will pay the credit cards. But we still are short. Our bills now, including food and gas, average about $1650. Obviously, we fall short. We have a 7-month-old baby who needs things, and we can’t afford them.

Should we file for bankruptcy?


Dear Crys,

Here is a big virtual hug for you to help you through today. The stress of what you are living through surely is intense. I still remember what it was like when I lived through it.

I’m struggling to answer your question because there is so much to say. Your situation typifies the kind of bind that many good people are facing.

Your income is down through no fault of your own, you already made hard choices and downsized your living arrangements, you’ve got student loans looking for payments and you can’t hang on.

I used to run a credit counseling organization. Things were a lot different back then but I do understand the inside of the credit counseling industry. You went to visit credit counseling and they put you on a payment plan but maybe they probably should not have done that.

Credit counseling today makes money not by giving the best advice, but by putting people into repayment plans. They get a percentage of the money they collect ‘donated’ to them by the banks. This is the same arrangement that debt collectors have with the banks.

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However, in some situations where people can afford the monthly minimum payments and are looking for a break in interest rates, credit counseling has some advantages and benefits.

Credit counselors are incentivized to put you into a debt management plan, unless people go into one and make their payments the credit counseling group does not make money. But they must make money to stay in business or they won’t be around to help people. It is a vicious circle with opposing motives. It’s complicated.

Credit counselors do not put together a repayment plan that is affordable and best for you. They instead tell you what creditors will accept when you are working with a credit counselor.

Ultimately the better solution is to take what money you can afford to repay each month and divide that among your creditors based on the percentage of the debt you owe each.

Let’s say you owe one Visa card an amount that is equal to 25% of your total debt. If we were going to be fair to all parties then that Visa card should get 25% of the available money you can afford to pay each month. That’s not the way credit counseling works. And furthermore, credit counselors do not ‘negotiate’ with your lenders, they are typically told by the lenders what your payment will be.

Based on what you’ve shared with me it sounds like what you can really afford to pay after the student loans kick in is around $100 per month.

You need to use more money to pay for the student loans but you can’t cut the budget so close that you’ve allocated every single dollar for repayment. You need to leave some room in your budget for fun, emergency savings, and saving for retirement.

Unless you factor in some fun in your budget it is highly unlikely that you will be able to live month-to-month for the next 5 years in a credit counseling program. You, like most, will fail along that path, and all the funds you struggled to pay each month until the plan fails will be wasted. It won’t eliminate your debt.

I’m absolutely not being cynical here, just honest and real.

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You asked if you should go bankrupt, you should absolutely look into it. You should go see a bankruptcy attorney for a free bankruptcy review and if you walk out of that office knowing that bankruptcy is for you, then file bankruptcy as soon as possible.

I would strongly advise you to meet with the bankruptcy lawyer before you make any more payments to the credit counseling group.

I’ve slammed credit counseling pretty hard in this answer but there is still a time when credit counseling can be beneficial, that’s when you need to bridge a short-term gap before your income will return and you can resume your regular payments.

Credit counseling is one solution used to deal with money troubles. It is not the only one and not always the best one at times. It can be a bit like grabbing a screwdriver to hammer in a nail if it’s not the right tool for the situation.

In this economy and without any real hope that piano playing and paying students are going to return in droves, holding out for more income right now would probably be a mistake.

Please update me in the comments section below with what you decide to do.


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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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2 thoughts on “We’ve Been to Credit Counseling But Should We File For Bankruptcy?”

  1. You should really discuss your particular situation with a bankruptcy attorney. If you are planning in staying in the house you will need to make some arrangements with Wells Fargo but your bankruptcy attorney will be able to specifically advise you.

  2. Do you know anything about reafirming homes after bankruptcy? Hence, if I don’t reaffirm and I keep paying will the company forclose( wellsfargo). We are current and have never been late. However, being the sole income provider I don’t want to reaffirm the house. Any thought?


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