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Enrolling in a debt management plan vs. filing for bankruptcy

On Behalf of | Oct 21, 2019 | Loan Modification vs. Bankruptcy

Whatever the circumstances that led you to this point, you are deeply in debt and are looking for a way out. It is a very difficult spot to be in. You may be considering enrolling in a debt management plan rather than the more widely known option of bankruptcy. Which is the right choice for you?

What is a debt management plan?

A debt management plan (DMP) is an alternative to bankruptcy in which you work with a credit counselor to renegotiate the terms of your debt repayment. The process of renegotiation can include reducing interest rates or monthly payments, waiving fees or even reducing the amount you owe. Essentially, the credit counselor goes to your creditors and they create a settlement agreement to close your accounts and pay off your agreed-upon remaining debt. To ensure that you are not taken advantage of by a credit counseling agency with exorbitant fees, it is a good idea to consult an unbiased third party, like an attorney, before signing any official documents. Some of the agencies will charge you huge amounts of money for a poor or disorganized service. This is a significant risk in going with a DMP.

However, A DMP will help you avoid defaulting on your credit or taking the drastic action of bankruptcy, which can have a devastating effect on your credit score. Know that your credit report may still suffer with a DMP, especially if you miss a payment to your credit counseling agency—or if the credit counseling agency pays your creditors late. It’s vital to be vigilant and monitor the credit counseling agency you choose, as not all these companies have your best interest at heart.

How enrolling in a DMP is different from filing for bankruptcy

You will not receive as much protection from creditors with a DMP, and you will be dealing with your debt crisis over a longer period of repayment. The impact to your credit score is not as debilitating as it is for the individual who files bankruptcy. Also, you will have a definitive debt-free date for which to strive. On that date, your unsecured debt will be paid off as you are not allowed to have any active credit cards while enrolled in a DMP.

Note that only certain types of debt qualify for a debt management plan. You can use a DMP for unsecured debt like credit cards and medical bills as well as some personal loans and collections accounts. Secured debts such as mortgages and auto loans as well as some student loans will be exempt from a DMP. This kind of fine print is why it is important to speak with a credentialed credit counselor and a lawyer before you enroll in a DMP. You need to know if a DMP is the right fit given the type of debt you have.

How a DMP works

Once your credit counselor negotiates a deal with your creditors, you will pay the credit counselor a certain amount every month to be distributed among your creditors. They will charge a fee for this service, but many people find this one-payment option appealing. You will continue with this arrangement for as long as it takes to repay the debt, which can be years.

Make the right choice

It’s a smart idea to not only consult a credit counselor about the details of a debt management plan but also to speak to a lawyer about what bankruptcy would look like for you. Gather all the information necessary to make the best decision for your financial future.

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