Bankruptcy: Does the idea of bankruptcy send shivers down your spine, but not the good kind? It’s a tough subject for many people. They know it can help, but they fear the stigma and long-term consequences, which is why they understandably seek other solutions.
What is a Debt Management Plan?
A Debt Management Plan, or DMP for short, is a program offered by a credit counselor to help you gain control over your unsecured debts through a single monthly payment to the credit counseling agency, which divides it among your creditors.
Comparing Debt Management Plans and Bankruptcy
There are significant differences between Debt Management Plans and filing for bankruptcy, and while there are consequences to filing for bankruptcy, you may be surprised to learn that filing in a timely manner could work in your favor.
What is the Duration of Each?
Debt Management Plan: Payments typically last up to five years. Chapter 7: The process usually takes four to six months. Chapter 13: The repayment plan lasts three to five years.
Will I Be Protected from Creditors?
Debt Management Plan: No, but your credit counselor will attempt to obtain your creditors’ cooperation, though it is not guaranteed. Chapter 7: Yes. The bankruptcy stay is a court order that halts creditor collection activities. Chapter 13: Yes. It’s the same situation as Chapter 7.
Are Debts Forgiven?
Debt Management Plan: No, but your credit counselor may seek concessions from creditors to lower interest rates, waive fees, or renew accounts. Chapter 7: Yes. This is known as discharge. It applies to most debts, but certain types of debt, such as recent taxes and overdue child support, are not discharged. Chapter 13: Yes. Debts are also discharged in Chapter 13, but you must pay many non-dischargeable debts in full under a Chapter 13 plan. Unsecured debts, like credit cards, are only paid in a Chapter 13 plan if you have sufficient income to cover them. Sometimes unsecured creditors receive a portion of their debts, and sometimes they receive nothing at all. But even if they aren’t paid, they will be discharged if you complete your plan.
What is the Length of the Repayment Plan?
Debt Management Plan: The repayment plan typically lasts up to five years. Chapter 7: There is no repayment plan. Chapter 13: The repayment plan is three to five years, depending on your income, expenses, debt amount, and type of debt.
How Much Does Each Cost?
Debt Management Plan: Typically costs around $25 per month. Chapter 7: The court filing fee is $338 (as of December 2020), and attorney fees range from $1,200 to $2,000 on average. Chapter 13: The court filing fee is $313 (as of December 2020), and attorney fees range from $3,000 to $4,000, usually paid over time as part of the Chapter 13 repayment plan.
How Does This Affect My Credit Score and Credit History?
Debt Management Plan: Your involvement in a Debt Management Plan does not count against your credit score, although it will be noted on your credit report. However, other consequences of the Debt Management Plan will affect you. For example, closing your accounts will affect the amount of credit available to you, which may impact your credit history, both of which factor into the credit score algorithm. Chapter 7: Bankruptcy significantly affects your credit score and, depending on where you started, you may end up somewhere between 520 and 550. However, if you are cautious, you can significantly raise that score to the point where you fall into the “Very Good” to “Excellent” category in two to three years. Remember that filing for bankruptcy will remain on your credit record for ten years. Chapter 13: A Chapter 13 plan will remain on your credit report for seven years from the date of filing if you complete the plan, or ten years if you do not complete the plan.
What
Are the debts included?
Debt management plan: only includes unsecured debts like credit cards and medical bills. It does not include car loans, mortgages, student loans, taxes, child support, and alimony. Chapter 7: Most debts are discharged, but there are some debts that are not discharged. To keep your secured debts, such as a car loan or mortgage, you must continue making monthly payments. Chapter 13: Most debts are discharged. You must pay some debts that cannot be discharged in Chapter 7 fully in the Chapter 13 plan. To keep your secured debts, such as a car loan or mortgage, you must continue making monthly payments. There are circumstances where you can add your car to your plan payments. You can also use plan payments to catch up on overdue home payments and prevent eviction.
Do I need to qualify?
Debt management plan: Generally, you do not need to qualify if you have enough income to cover your payments. Chapter 7: Yes. You must pass the “means test.” If your income, after deducting certain expenses, is below the median income for your state, you pass. Chapter 13: There is no means test, but your proposed repayment plan must be feasible, meaning reasonable based on your income and expenses. There is a debt limit in Chapter 13 of $1,257,850 in secured debts and $419,275 in unsecured debts, effective from April 1, 2019, through the end of 2021.
Can I get additional debts while participating?
Debt management plan: No, you may have to close the accounts included in the debt management plan, and you cannot incur new debts while in the debt management plan. Your creditors will monitor your credit report. If they see new accounts appearing, your debt management plan will end. Chapter 7: Generally no. But after discharge, you will start receiving credit offers again immediately. Chapter 13: You cannot incur additional debt without permission from the bankruptcy court, and only for a really good reason, such as replacing a car.
Will I have to give up any property?
Debt management plan: No, just make your monthly payments. Chapter 7: Maybe, if you have non-exempt property. In the vast majority of Chapter 7 cases, assets are not distributed to creditors. Chapter 13: No, just make your monthly payments.
How can I find someone to help me?
Debt management plan: Look for a nonprofit credit counseling agency in your area that is a member of the National Foundation for Credit Counseling or the Financial Counseling Association of America. Our list of best credit counseling agencies is also a good place to start. Chapter 7 and Chapter 13: You can file for bankruptcy on your own. It is called filing “pro se.” But your chances of success decrease significantly if you go alone. There are many resources available to help you choose a professional to guide you through this process.
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Source: https://www.thebalancemoney.com/debt-management-plan-vs-bankruptcy-4159661
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