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Bankruptcy is often preferable to credit counseling and debt consolidation alternatives. Many people are afraid to file for bankruptcy, and choose to work with a credit counselor or debt consolidation company instead. For many of these people, this is a huge mistake. They end up in worse financial shape than if they had filed bankruptcy. Others negotiate plans than are more burdensome than if they had filed bankruptcy, and often make payments for months or years with little or nothing to show for their sacrifice.

There are several problems with credit counseling agencies and debt consolidators. This is true even if it is a non-profit agency. First, it is not uncommon for a non-profit credit agency to be investigated by the IRS. By claiming to be non-profit, the agency has given the impression that it is working on your behalf. This is often not true. These companies are not charities. A non-profit simply means that the entity does not have shareholders that are paid the profits of the company. It does not mean that the officers and those running the corporation are not being paid exorbitant salaries and fees, which is one of the reasons they may be investigated by the IRS. Second, some of the non-profits and other companies are funded in part by the creditors that you are trying to negotiate with. As a matter of ethics, these companies do not hold your interest first. Some may even receive a percentage of the payments that they are able to extract from you.

More importantly, what can a debt consolidator do for you that you cannot do for yourself? These companies simply try to negotiate payment plans or interest rate reductions. They can give you no guarantee that they will be successful. Also, certain creditors may not work with the companies, and the proposed plan may fail.

Bankruptcy is often superior to debt consolidation, because it offers a legal platform for resolution of the problem. Bankruptcy can get rid of your debts entirely, or it can propose a plan to substantially reduce your debt and/or interest. Most people who file bankruptcy do not lose any of their property. Unlike credit counseling, bankruptcy can stop harassing phone calls, utility shut-offs, garnishments, repossessions, foreclosures, and property seizures. Those that file Chapter 13 bankruptcy often pay back a fraction of what they owe. Many people are surprised to find that their estimated credit scores often improve 12 months after filing.

Another common mistake people make before resorting to filing bankruptcy is depleting their IRAs or 401(k)s. Your retirement is for your retirement. It’s to help you when you are at an age when you are no longer able to work. It is not a piggy bank. You cannot depend on the meager benefits of social security. Many people pay substantial penalties when taking funds out of their retirement for hardship purposes. Often, the repayment of these loans reduces your paycheck, making it more difficult to meet your household bills.

In summary, consider bankruptcy as a first choice when dealing with overwhelming financial problems. If choosing a credit counselor or debt consolidator, make an appointment with a bankruptcy attorney to compare the alternatives. Finally, do not borrow from your retirement plan, save it for your retirement.