Debt Management Assistance Services Vs. Bankruptcy: How Do They Affect Your Credit Rating?

So, your credit card payments have gotten out of hand? It’s getting too hard to make the payments on the car loan, plus keeping up with the medical bills and paying down that gas card? You may be tempted by a debt management assistance service. What do these places do for you? One of the best-known, CCCS (Consumer Credit Counseling Service) reports on its website that it and Money Management International are “non-profit community service organizations that provide confidential financial guidance, debt management assistance and free consumer credit counseling services.”

I’m not running down services like this when they are used correctly-honest. Financial guru Suze Orman recommends CCCS for people who need it. What I am saying is that there’s something they don’t tell you about these services, and that is, they can trash your credit rating.

Here’s my experience. About twelve years ago, my husband and I were living on his fairly small salary with two small kids. We used credit cards too much and had a car payment, and we decided that our monthly bills were mounting excessively. We needed to cut back. Keep in mind that we weren’t behind on any of our payments on anything, we just decided that we ought to be budgeting more carefully.

We heard about CCCS and it sounded good. We wanted to take a firm step to force ourselves to get debt under control-this seemed like it. So we signed up. (I actually thought, if I thought at all, that this step would IMPROVE our credit rating.)

CCCS took over our debts and arranged a monthly payment. We would pay them, and they’d pay our creditors for us. Of course, we had to promise not to sign up for any more credit, and we wouldn’t be able to use our credit cards any more, but we were okay with that. We wanted to get out of debt. As I recall, it was going to take about five years to get everything paid off, but we were started! Seemed great.

Then my husband got reappointed to another city. He’s a pastor, and we’d been living in a parsonage provided by the church. The new job, however, didn’t include a parsonage-it had a housing allowance! Yippee! This meant that I could have my dream come true and we could purchase our own home, in any neighborhood we wanted. I’m partial to older houses-farmhouses, bungalows-in older neighborhoods, but most parsonages are newer, ranch-style homes, so I was thrilled that we’d get to buy a house we really liked.

Time to go house shopping. I loaded up one of the kids and drove to our new town early one morning, picking up a copy of the paper and a Homes Magazine on the way-we were going to buy a house! We looked at a couple of places, and then it was suggested to us that we get pre-approved for a loan before deciding on anything. No problem, I figured-the church would actually be the one making the payments, although the house would be in our name, so we knew exactly how much payment we could afford. We wouldn’t be able to buy as much house as I had hoped, but at least it would be ours.

I was in for a rude awakening. No one would give us credit once they saw “CCCS” on our credit report. I made phone calls to lenders, desperately explaining that the church would be making the payments, not us, so they could be sure they’d get paid. They wouldn’t even return my phone calls. We ended up renting for the next four years. Finding a rental is not a whole lot of fun when you have kids and multiple pets.

It was later explained to me that debt management services damage your credit report as much as a bankruptcy, or even more so. At least with bankruptcy, your debts have been erased so lenders know that you have money available that you didn’t have before. They also know that you can’t declare bankruptcy again for a number of years, so they figure it’s safer to loan you money. With debt management services, the debts remain, so you still have that lousy “debt to income” ratio on your report, plus the stigma of using the service.

These services do disappear from your credit report eventually. Once the debts that were turned over to them have been paid off, you can find out how long it will be before the whole thing goes off your report and lenders never even know you did it. With bankruptcy, even after it’s off your report, you’ll always have to answer “yes” to that question of “Have you ever declared bankruptcy?” So in the long run (as in, looking at ten years down the road) it’s better for your credit report for you to go with a debt counseling center than to declare bankruptcy. But if you think you’ll have any need of getting credit any time soon (as in, say, your car could die any time), think twice before going with one of these agencies. You might have to get all those debts paid off and then wait an additional chunk of time before it goes away. Ask them how using their service will affect your credit report before you sign up. Better yet, call some car dealers or home loan places and ask them whether using a service like CCCS would affect your ability to get a loan.

What can you do instead? Many people recommend that you just contact your creditors yourself. You may be able to act as your own debt management service and get your interest rates reduced or your due dates extended, if you tell them that you’re having trouble meeting your payments. You’ll also have to promise not to use the account any more, but if you’re having trouble making your existing payments, you probably shouldn’t be using credit cards anyway. Just be sure to ask your creditors exactly how your arrangements will affect your credit rating!

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