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When it comes to debt relief options, one size definitely does not fit all. People who are trying to get out of debt have varying levels of debt, income and resources, along with different financial aspirations and goals. So, what’s right for one person or family may not be right for someone else. Let’s look at two popular debt relief options: debt management plans vs. bankruptcy.

What Are Debt Management Plans?

Debt management plans (DMPs) are a type of debt consolidation offered and managed by nonprofit credit counseling agencies. Clients on debt management plans make one monthly payment to the agency, who then disburses those funds to all the client’s creditors enrolled on the plan.

The credit counseling agencies have relationships with creditors that allow them to secure lower interest rates for their clients. This means more of clients’ monthly payments go toward paying down the principal balances, so they can pay off debt more quickly while saving money in interest.

What Types of Debt Can You Pay on a DMP

Debt management plans are designed to help consumers pay off unsecured debt, with a focus on credit card debt. Certain types of debt in collections and some medical debts may also be added to DMPs as a courtesy, but they will not receive any interest rate concessions.

Who is a Good Candidate for a DMP?

Debt management plans are an excellent debt relief choice for consumers who are feeling overwhelmed by credit card debt. They likely have a steady income and can meet monthly expenses, but they can’t make progress on paying off credit cards due to the high interest rates. Although they pay their bills each month, it can feel like running on a hamster wheel — a lot of effort with no real progress.

What Else Should I Know About DMPs?

Since the goal of a debt management plan is to help people get out of debt, DMP clients must close all the credit card accounts enrolled on the plan. Additionally, they should avoid taking on other new debt while on the plan, unless it’s absolutely necessary.

Closing the accounts at the beginning of the plan may cause a client’s credit score to drop in some cases. But over the course of the plan, as clients make payments on time and balances drops, credit scores will recover. Many clients on DMPs report having their highest credit scores ever by the time they complete their plans.

Depending on the amount of debt they start with and how much they’re able to pay each month, most clients pay off their credit card debt in full in 2-5 years. Some agencies will create a longer timeframe if necessary. But many clients are so inspired by their early success on a DMP, they make extra payments and end up paying off their debt earlier than expected.

What is Bankruptcy

Bankruptcy is a legal process that discharges or restructures an individual’s or business’s debts when they become unmanageable. The two most popular common types of consumer bankruptcy are Chapter 7 and Chapter 13. For those who really need it, bankruptcy can be a financial fresh start.

What Types of Debt Are Included in Bankruptcy?

Chapter 7 and Chapter 13 bankruptcy primarily address unsecured debts, including credit card debt, medical debt and personal loans. Bankruptcy does not eliminate student loan debt, back taxes or court-ordered spousal- or child-support payments.

Do I Need an Attorney to File Bankruptcy?

The court does not require individual bankruptcy filers to have an attorney; you can file on your own. That’s not recommended, however. Bankruptcy is a complex legal process that relies heavily on paperwork. If you’re not familiar with bankruptcy laws and legal terminology, it can be very easy to complete the paperwork incorrectly, resulting in invalid filings or unfavorable outcomes.

At the very least, you should consult with a qualified bankruptcy attorney before you start the filing process to confirm whether proceeding with filing bankruptcy is the right choice for your situation.

How Long Does a Bankruptcy Affect Credit

Chapter 7 bankruptcy stays on a person’s credit for 10 years, while Chapter 13 stays on the credit report for seven years. Most people find it difficult to obtain new credit at reasonable rates immediately after filing either type of bankruptcy. The impact will lessen over time, especially if you make a concerted effort to improve your credit following bankruptcy.

What Else Should I Know About Bankruptcy

Bankruptcy laws vary by state, which is why it’s important to consult with a qualified attorney at the beginning of the process. You’ll want to make sure you’re following all the steps for filing properly.

There is no legal limit to the number of times someone can file bankruptcy, but it’s not a process you should overuse or look at as a “get out of debt free” card.

You should research all your debt relief options, including debt management plans vs. bankruptcy before deciding bankruptcy is the way to go.

woman working on balancing budget

Struggling with Credit Card Debt?

A debt management plan can help:
  • Consolidate monthly payments
  • Lower interest rates
  • Eliminate collection calls

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