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Bankruptcy vs Credit Counseling by the Numbers

For consumers who get in over their heads, deciding whether to file for bankruptcy or go through the process of credit counseling can be a tough one. On one hand, bankruptcy can sometimes seem like the easiest route. The debts automatically go away, and they get to start with a clean slate.

On the other hand, the debt management plans (DMP) that result from credit counseling can take years to pay back and feel like a slow slog uphill. With the lure of a quick and “easy” debt reduction, bankruptcy can start to look alluring. This is why it is so important for consumers to understand bankruptcy and credit counseling by the numbers.

How Bankruptcy Can Affect Your Cardmembers

There are some instances where filing bankruptcy make sense – specifically when the debt to income ratio is too high for an individual to realistically pay it off. However, in at least 1/3 of cases, DMPs can prevent the consequences of filing bankruptcy.

One of the top consequences of filing Chapter 7 or Chapter 13 is a large hit to a cardmember’s credit score. The number that the score drops depends on how high it was to begin with. Individuals who had higher scores lose more points and take a much harder hit. For example, someone with a credit score of around 780 can see their credit score drop by 220-240 points.

Additionally, individuals who file bankruptcy often cannot purchase a home for at least three years following the filing. Once they do purchase a home, they experience much higher interest rates. These can vary between about 1.5% and 6% higher than individuals who have never filed bankruptcy in the past, which can put the payment out of reach.

Realizing the consequences of bankruptcy and the difficulty it causes over the 10 years that it remains on their record can give people pause to consider other options. These options may be shorter in duration, save money, and place them in a better position when finished.

Credit Counseling by the Numbers

Though individuals who file bankruptcy are required to undergo 60-90 minutes of credit counseling prior to filing, many people have already made up their minds at this point that bankruptcy is the only way out.

Taking a look at the numbers from credit counseling agencies (CCAs) and understanding the outcomes may change cardmembers’ minds:

  • 2/3 of clients who underwent credit counseling said that they were better at managing their money for the long haul

  • The average credit score for these individuals jumped by an average of 14-50 points rather than falling

  • DMP clients saw an interest rate change from about 22% down to about 8%, saving them a significant amount of money

Perhaps the most important advantage of credit counseling for individuals with financial troubles is the long-term knowledge that they gain. Understanding how to manage money benefits both the cardmember and future lenders that they work with.

What Lenders Can Do to Help

As a lender, you never want to see your cardmembers file bankruptcy or receive a charge-off. It means that you lose money and you lose a cardmember who could have been a good long-term asset to your institution, which is why it is critical to be able to recommend quality CCAs to your cardmembers. CCAs can ensure your customer is well-informed of their options.

Peregrin has the tools to help your institution easily manage DMPs and CCAs. Give us a call today at 1-800-231-2493 or contact us on the website for more information.

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