Which Is Better: Debt Management Plan or Bankruptcy?
Bankruptcy. Does the thought of it give you chills, but not the good kind? It’s a tough subject for many people. They know it can help, but they’re afraid of the stigma and the long-term consequences so they, understandably, look for other solutions.
Let’s look at how bankruptcy stacks up against one of its more popular competitors, the debt management plan.
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 of your unsecured debt by making one monthly payment to the counseling agency, which divvies it up among your creditors.
Most DMPs work like this:
- You gather details on all your accounts and provide them to a credit counselor.
- The counselor negotiates with your creditors to take a certain amount each month in lieu of regular payments. Often, the creditor will agree to lower interest, lower fees, or re-aging the account.
- You agree to make one monthly payment to the counseling agency to pay off the debts as negotiated by the counselor over a certain period.
Comparing DMPs to Bankruptcy
There are significant differences between DMPs and filing for bankruptcy, and you may be surprised to learn that bankruptcy offers some powerful advantages. For more detail on how bankruptcy works, check out these articles:
Note for the moment that there are two kinds of bankruptcy that we’ll compare to DMPs, Chapter 7 is straight bankruptcy, which forgives debt without a payment plan, and Chapter 13, which is a payment plan that lasts from three to five years.
Here’s a rundown of the comparison of DMPs and both kinds of bankruptcy:
How Long Does It Last?
- DMP: Usually up to five years of payments.
- Chapter 7: Usually four to six months
- Chapter 13: The payment plan is three to five years.
Will I Be Protected From Creditors?
- DMP: No, but your credit counselor will attempt to secure the cooperation of your creditors, but it is not required.
- Chapter 7: Yes. Bankruptcy’s automatic stay is an injunction against creditor collection activity.
- Chapter 13: Yes, same as Chapter 13
Are Debts Forgiven?
- DMP: No, but your credit counselor may seek concessions from your creditors to reduce interest, forgive fees, or re-age accounts.
- Chapter 7: Yes. This is called discharge. It applies to most debt, but some types of debt like recent taxes and past-due child support are not discharged.
- Chapter 13: Yes. Chapter 13 also discharges debts, but many of the nondischargeable debts like recent taxes and past-due child support must be paid in full in the Chapter 13 plan. Unsecured debt like credit cards will only be paid in a Chapter 13 plan if you have the income to cover it. Sometimes unsecured creditors receive a portion of their debt and sometimes they receive nothing at all. But even if they’re not paid they’ll be discharged if you complete your plan. To see how this works, visit Introduction to Chapter 13 Bankruptcy.
How Long Is the Payment Plan?
- DMP: Usually up to five years.
- Chapter 7: There is no payment plan.
- Chapter 13: Three to five years depending on your income, expenses, amount of debt and type of debt.
How Much Does It Cost?
- DMP: Usually around $25 a month.
- Chapter 7: Court filing fee of $335 (currently as of 2018), plus attorney’s fees of $1,200 to $2,000 on average.
- Chapter 13: Court filing fee of $310 (currently as of 2018), plus attorneys’ fees of $3,000 to $4,000 usually paid over a period as a part of the payment plan.
How Does It Affect My Credit Score and Credit History?
- DMP: The fact that you’re participating in a DMP isn’t calculated into your credit score, although it will be noted on your credit report. That said, other consequences of the DMP will have an effect. For instance, closing your accounts will affect the amount of credit you have available and could impact your credit history, both of which figure into the credit score algorithm. To learn more about how credit scores are calculated, visit How Debt Affects Your Credit Score.
- Chapter 7: Bankruptcy has a dramatic effect on your score and depending on where you started from, you’ll probably end up somewhere between 520 and 550. But, if you’re careful you can raise that score dramatically so that in about two to three years, you’re in the very good to excellent range. Chapter 7 will stay on your credit record for ten years. Check out How to Improve Your Credit Score After Bankruptcy.
- Chapter 13: A Chapter 13 plan will stay on your credit record for seven years from filing if you complete the plan, or ten years if you don’t complete the plan.
What All My Debts Included?
- DMP: Only unsecured debts like credit cards and medical bills. No car loans, mortgages, student loans, taxes, child support or alimony.
- Chapter 7: Most debts are discharged, but some are not. To keep your secured debts like car loans or mortgage you have to continue making monthly payments.
- Chapter 13: Most debts are discharged. Some debts that are not dischargeable in a Chapter 7 case have to be paid in full in a Chapter 13 plan. To keep your secured debts like a car loan or mortgage, you have to continue making monthly payments. There are circumstances in which you can add your car into your plan payment. You can also use the plan payment to catch up past due house payments and prevent foreclosure.
Do I Have to Qualify?
- DMP: Not normally if you enough income to cover your payments.
- Chapter 7: Yes. you have to pass a “means test.” If your income, minus certain expenses, is lower than the median income for your state, you pass.
- Chapter 13: No. There is no means test, but your proposed payment plan has to be feasible--that is, affordable based on your income and expenses. Chapter 13 does have an upper debt limit of $1,184,200 in secured debt and $394,725 in unsecured debt (as of 2016).
Can I Get More Debt While I’m Participating?
- DMP: No. You’ll probably have to close the accounts that you’re including in the DMP, and you can’t seek out new debt when you’re in a DMP. Your creditors will be monitoring your credit report. If they see new accounts popping up, your DMP will be toast.
- Chapter 7: Not generally. But after your discharge, you’ll start receiving credit offers again. Right away. Really!
- Chapter 13: Not without permission of the bankruptcy court, and only for a really good reason like to replace a car.
Will I Have to Give Up Any Property?
- DMP: No, just your monthly payments.
- Chapter 7: Maybe, if you have a property that is not exempt. Fewer than 5 percent of bankruptcy filers have to give up property.
- Chapter 13: No, just your monthly payments.
How Do I Find Someone to Help Me?
- DMP: If you search the internet for the term “debt management plan,” you’ll come up with perhaps hundreds of companies and non-profit agencies willing to help you formulate a debt management plan. Some of these are for-profit companies, and some claim to be non-profit. Your best bet is to go with an affiliate of the National Foundation for Credit Counseling, which is truly non-profit, experienced, and respected. The NFCC website has a search function that will help you find an affiliated agency, or search for Consumer Credit Counseling of [your city or region].
- Chapter 7 and Chapter 13: You can file a bankruptcy case yourself. It’s called filing “pro se.” But your likelihood of success is greatly diminished if you go it alone. To learn more about getting help to file your bankruptcy case, read How to Choose a Bankruptcy Lawyer.