Bankruptcy. Does the thought of it give you chills, but not the right kind? It is a difficult subject for many people. She knows it can help, but they fear the stigma and the long-term consequences, so they understandably look for other solutions.
Let’s see how the bankruptcy excels when compared to one of the 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 a monthly payment to the counseling agency, making it divvies up among your creditors.
Most DMPs work as follows:
- You collect information about all your accounts and send them to a credit counselor.
- The counselor negotiates with your creditors to take a certain amount each month instead of the regular payments. Often, the creditor will agree to lower interest rates, lower rates, or re-aging the bill.
- You agree to make a monthly payment to the counseling agency to pay off the debts as agreed by the counselor over a certain period.
Comparing DMPs to Bankruptcy
There are significant differences between DMP and bankruptcy, and you may be surprised to learn that bankruptcy offers some powerful benefits. For more information about how the bankruptcy works, check out these articles:
- What is Bankruptcy?
- What are the consequences of the bankruptcy?
- Reasons for Bankruptcy Now File
Note for the moment that there are two types of bankruptcy that we compare to DMPs, Chapter 7 is bankruptcy law, which forgives debt without a payment plan, and Chapter 13, which is a payment plan that lasts from three to five years.
Here is an overview of the comparison of DMPs and both types of bankruptcy:
How long does it take?
- DMP: Usually up to five years in payments.
- Chapter 7: Usually four to six months
- Chapter 13: The payment plan is three to five years.
Will I be protected against creditors?
- DMP: No, but your credit counselor will try to secure the cooperation of your creditors, but it is not required.
- Chapter 7: Yes. Suspension of payment Bankruptcy is an order against creditor collection activity.
- Chapter 13: Yes, the same as that of Chapter 13
Are debts forgiven?
- DMP: No, but your credit counselor can win concessions with your creditors to lower interest rates, forgive fees, or re-age accounts.
- Chapter 7: Yes. This is going to be a discharge. It applies to most debts, but some types of debts, such as recent taxes and arrears, are not discharged.
- Chapter 13: Yes. Chapter 13 also discharges debts, but many of the nondischargeable debts such as recent taxes and arrears of maintenance must be paid in full in the Chapter 13 plan. Unsecured debt such as credit cards are only reimbursed in a chapter 13 plan if you have the income to cover it. Sometimes unsecured creditors get a part of their debt and sometimes they get nothing at all. But even if they didn’t pay they will be fired if you complete your plan. To see how this works, visit Chapter 13 Bankruptcy Basics.
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, the amount of the debt and the nature of the debt.
How much is it?
- DMP: usually around $ 25 per month.
- Chapter 7: court filing fee of $ 335 (currently from 2018), fees plus attorney fees of $ 1,200 to $ 2,000 on average.
- Chapter 13: Court filing reimbursement of $ 310 (currently from 2018), plus costs of $ 3,000 to $ 4,000 lawyers usually paid overtime as a part of the payment plan.
How does my credit score and credit history affect?
- DMP: The fact that you participate in a DMP is not calculated in your credit score, but it will be stated on your credit report. That said, other effects of the DMP will have an effect. For example, closing your accounts will affect the amount of credit you have available and can affect your credit history, both of which figure out in the credit score algorithm. For more information on how credit scores are calculated, visit Learn how Debt affects your credit score.
- Chapter 7: Bankruptcy has a dramatic effect on your score and depending on where you started, you will probably end up somewhere between 520 and 550. But, if you are careful you can dramatically increase that score so that in about two to three years, you are in the very good to excellent range. Chapter 7 stays on your credit record for ten years. Check out How to survive new credit and thrive after bankruptcy.
- Chapter 13: A Chapter 13 plan will remain on your credit record for seven years of submission if you complete the plan, or ten years if you don’t complete the plan.
What All my debts included?
- DMP: Only unsecured debts such as credit cards and medical bills. No car loans, mortgages, student loans, taxes, child benefits or alimony.
- Chapter 7: Most debts are discharged, but some are not. To keep your secured debts such as car loans or mortgage you must continue to make monthly payments.
- Chapter 13: Most debts are discharged. Some debts that cannot be discharged in a Chapter 7 case must be paid in full in a Chapter 13 plan. To keep your secured debts such as a car loan or mortgage, you have to keep making monthly payments. There are circumstances where you can add your car to your plan payment. You can also use the payment plan to retrieve expired house payments and prevent foreclosure.