Credit counseling is a process of educating consumers about personal financial management and how to avoid accumulating debts that cannot be repaid. The goal of credit counseling is to help consumers find ways to repay their debt through careful budgeting, reducing interest rates and better management of finances.

Credit counseling agencies usually recommend enrollment in a Debt Management Program (DMP) and therefore sometimes you will hear the terms ‘Credit Counseling’ and ‘Debt Management’ used interchangeably.

Filing for bankruptcy puts into effect an “Order for Relief” — known informally as the “automatic stay.” The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally garnish your wages, empty your bank account, repossess your car, foreclose on your house or other property, or cut off your utility service or welfare benefits.

Before you get too excited it is important to know that creditors can ask the bankruptcy court to lift (remove) the Automatic Stay if the stay is not serving its intended purpose. For example, if you have no equity in your house, can’t pay your past-due mortgage bills, have no foreseeable way to make future home payments, and then file for bankruptcy a week before your house is to be sold in foreclosure, the bank/loan company will probably ask the bankruptcy court for permission to proceed with the foreclosure — and that permission will likely be granted. Sorry.

Chapter 7, entitled Liquidation Under the Bankruptcy Code, creates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and then makes cash distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors.

A Chapter 7 bankruptcy is often also referred to as a “straight” bankruptcy. Generally speaking, under a Chapter 7 bankruptcy, debtors give up most of their property in exchange for forgiveness of most of their debts. The property is given to a trustee, who liquidates (sells) it and distributes the cash to creditors based on certain rules of priority regarding the debt that is owed.

Unlike Chapter 7 bankruptcy, which requires people to liquidate (sell) their assets and use that cash to repay their debts, Chapter 13 bankruptcy requires debtors to restructure their debts and create a three to five year repayment plan. Under the repayment plan, the debtor will use his future income to pay off, in full or partially, his creditors. As such, Chapter 13 bankruptcy is applicable only to debtors with regular income. The process of a Chapter 13 repayment plan is supervised by an impartial trustee that is appointed by the court.

Your attorney will work with you to create a repayment plan that is likely to be approved by the court and is manageable based on your income. Repayment must begin within 30 to 45 days of starting your case. Creditors are required to adhere to the repayment plan as approved by the court, and are prohibited from collecting any claims against you.

Sometimes Debt Management is referred to as Credit Counseling, but credit counseling and debt management are different things. The reason why they are so often used interchangeably is because a Debt Management Plan or Debt Management Program (DMP) is a solution typically recommended by a credit counseling agency.

If you have significant credit card debt at an interest rate above 15% and you are struggling to make your minimum credit card payments, you may be eligible to enroll in a Debt Management Program (DMP).

Bankruptcy is frequently disfavored because of its far-reaching and long-lasting effects on a consumer’s credit report. Consumers that have a debt level that is impossible to handle based on their income should never take bankruptcy “off the table”, however, because it might offer the only way to a fresh start.

Typically, bankruptcy remains on your credit report as a negative item for either 7 or 10 years, depending on the type of bankruptcy that you complete. As a result, you may have difficulties:

The first thing that we should clarify is that debt settlement is NOT the same as debt consolidation. A lot of people are under the impression that it’s the same kind of program and that creditors willingly work with debt settlement agencies. Debt consolidation requires you to pay off all of your debt under one big loan and is only available to people with good or excellent credit. Debt settlement is quite different.

A debt settlement agency attempts to negotiate with your creditors to settle your unsecured debt (i.e. credit card debt, unpaid medical bills, store card debt) for less than what is currently owed. More specifically, in a debt settlement program you withhold payments from your creditors in order to get them to settle for a lower amount than what you owe them. That means that you will have to default on the creditors first, if you have not already done so. Additionally, there are no guarantees that your creditors will settle.

Debt consolidation is completely different than debt settlement or debt management. Debt consolidation does NOT involve any debt forgiveness, or lowering of interest rates on your existing loans.

In its simplest sense, debt consolidation involves taking out one large loan, such as a home equity loan, to pay off one or a couple unsecured loans or lines of credit that are generally at a higher interest rate. Consumers usually consider debt consolidation for one or more of the following reasons:

Outside of negotiating a manageable solution with your credit card company, there are 3 additional ways that you can get help on your credit card debt.

There are four major debt solutions that allow consumers to get debt relief:

• Debt Consolidation
• Debt Settlement
• Debt Management
• Bankruptcy

Here is a quick overview of these debt solutions: