Yes, if someone is currently in credit counseling it is looked at as a bankruptcy, because it is the next best thing. However, it has advantages over a CH 13 bankruptcy, which involves discharging some debts and setting up a payment schedule for the rest--similar to credit counseling. The difference is in how these debts will be reported.
In credit counseling, you make 2-3 payments to show that you are serious, and the creditors will re-age your accounts up to date. That's in the agreement they accept. Thus, you have all up to date accounts, you are improving your credit score and you are making headway on paying off your debts.
In CH 13 bankruptcy, you will probably start with a lower debt to repay. However, it will be 3-4 mos before your creditors ever see any money from your payment plan, and you were already behind. 90% of the time, your debts will be "charged off", although they will be receiving something. Even after you have completed the plan, you screwed them down to paying $500 when you owed $1000 (for example). Even when this is said and done, your remaining $500 that you didn't have to pay will still be reported as a charged off balance. That stays on there for ANOTHER 7 years from the date of last payment out of the plan, which was probably 48-60 mos. That means that BAD credit, a CHARGE OFF will be with you for about 11 years or so, in the end. That bankruptcy may come off after 7 years, but that charge off may still be there for a while to come, with a comment at the bottom "included in CH 13 bankruptcy". Therefore, that bankruptcy is still following you. So, what you have on your credit report is all BAD. You didn't pay as agreed, the accounts were charged off, so in a few years when you decide it's time to rebuild credit so you can buy that house, all you show in your report are charged off accounts. If you'd have done the credit counseling, you'd have had a good score years ago.
Credit counseling does not affect your credit score! It is looked at as a bankruptcy (when or *IF* the creditor finds out about it), but it does not lower your credit score. Once you paid out of the plan, it's all good. You showed responsibility and it isn't held against you anymore. If you were bankrupt, well, it may still haunt you.
If you apply to buy or refinance a house, on page 3 you will see a list of questions. #2 is "Have you been declared bankrupt in the past 7 years?" If you were in credit counseling, you can answer that "NO" and have a better credit score.
Probably 70% of people fall out of credit counseling OR CH 13 bankruptcy. That's because they don't have staying power and self-will to stick to it. Those people rarely change their situation for years and years to come. Stick with it and it WILL work.
Ch 7 may get you out of all of the revolving, unsecured debt, if you meet the requirements. It'll be on your credit, but it's better to show dates of being cut off of your credit due to a discharge on "7/15/03 discharged, CH 7" than to string out a bunch of uncollected charge off's that continued to be reported for years to come. Bankruptcy is bad, but it is still better since at least you DID something. Distasteful, but you didn't leave everyone dangling in the wind trying to collect for years, doing MORE AND MORE damage to your credit. File Ch 7, get a discharge and your credit gets shot to hell. However, it also starts rebuilding from that point. Disregard everything and do nothing and your score will be constantly shot down as items charge off, items are "transferred to collection" resulting in *another* chargeoff tradeline *for the same debt*. 2 bad reports for the price of 1. They'll continue reporting, continually shooting down your score. It'll take years to start working back up.
BTW, taking out a loan while in a CH 13 plan is illegal. Car dealerships do it all the time, sadly, because no one follows up. To do it legally, you have to get permission from the bankruptcy court.
Options:
#1 Credit counseling: start rehabilitating your credit immediately, do the right thing and pay what you owe, but probably less with no late fees and reduced rates.
#2 If livable terms can't be met, file Ch 7: take a big hit on your score, but then start rebuilding.
#3 Pay no one, don't answer the phone, ignore "Privacy director" on your caller id 20 times a day, live with the risk and stress of possbile legal action from several directions (only 1 way to find out if they'll do it, willing to risk it?), continually downgrade your credit for years and years to come.
DO NOT just let things go. That is incredibly bad, unknowledgable, short sighted advice. Easy to say when it isn't you that has to live with it. Sure, it's an option, but so is robbing a bank.
Don't tell the guy to do something that will affect him EVEN LONGER than his idea to file bankruptcy. Do I need to go further with this?
