Debt Management vs Bankruptcy

Many people know that bankruptcy can be a great relief to many of their financial problems. Still, they believe there is still a stigma attached to it, and they are concerned about the long-term consequences they will face. It is not uncommon for people to explore many different options before they start the bankruptcy process, and one of these is often a debt management plan. If you have thought about filing for bankruptcy in Florida, and you also want to know about debt management plans, below is a breakdown of the two processes, and the possible outcomes.

What are Debt Management Plans?

Debt management plans, or DMPs, are programs credit counselors offer to  help borrowers maintain control of their unsecured debt. The borrower makes one payment every month to the credit counseling agency, and the agency then divides it between the creditors the consumer owes debt to. When working on a debt management plan with a credit counselor, the process is usually as follows:

• You will collect all details of your different loan and credit accounts and provide them to the credit counseling agency.
• A credit counselor will then negotiate with all of your creditors and come to an agreement in which you pay a smaller amount every month. Creditors will typically agree to charge lower fees, a lower interest rate, or to extend the life of the loan or the account.
• You sign an agreement stating that you will pay the lower amount negotiated by the credit agency over a certain period.

Chapter 7 and Chapter 13 Bankruptcy

People considering a debt management plan are also often considering filing for bankruptcy. There are typically two types of bankruptcy consumers file. The first is Chapter 7 bankruptcy. In this type of bankruptcy, most of all of your debts can be discharged, but you may lose some assets during the process. In a Chapter 13 bankruptcy, your debts are restructured into a new payment plan. You will then have a certain amount of time to repay the debt making regular payments, and you will likely not lose any assets.

How Long Does a Debt Management Plan Last vs Bankruptcy?

The timeline of a Chapter 13 bankruptcy case and a debt management program are often very similar. After you file Chapter 13 bankruptcy, the repayment plan will likely extend between the next three and five years. In a debt management plan, you will usually have to repay the debt over the next five years. A Chapter 7 bankruptcy, on the other hand, will discharge you of your debts very quickly, usually taking only four to six months.

Creditor Protection of Florida Bankruptcy vs a Debt Management Plan

When filing both Chapter 7 and Chapter 13 bankruptcy, a bankruptcy judge will issue an automatic stay. The automatic stay means that creditors and debt collectors are prohibited from contacting you and trying to collect on the debt. With a debt management plan, there is no automatic stay available and so, creditors can still contact and harass you about the debt. A credit counselor will usually try to come to an agreement with creditors and debt collectors that they will not contact you, but their cooperation is not required.

Chapter 7 vs Debt Management Plan

People generally consider filing for bankruptcy because they want to eliminate some of their debt. A Chapter 7 bankruptcy allows for the forgiveness of the greatest amounts of debt. This is known as discharging debts and while you can eliminate certain debts, such as credit card balances, car loans, and even mortgages, in Chapter 7, you cannot discharge others. For example, tax debt and child support payments cannot be discharged.

A debt management plan doesn’t erase your debt. Instead, a credit counselor will work with your creditors and debt collectors to lower fees and interest rates, although the overall debt amount usually stays the same.

Chapter 13 vs Debt Management Plan

During a Chapter 13 bankruptcy, some debts may be discharged, but you will likely have to repay some of them. Again, child support and tax debt are two types you cannot discharge in Chapter 13. However, you may be able to discharge some credit card debt. The only time borrowers must repay unsecured debt in a Chapter 13 bankruptcy is when they have sufficient income to do so.

A debt management plan will not discharge any of your debt. A credit counselor will work with your creditors and other debt collectors to negotiate forgiven fees and reduced interest rates, but the amount of debt is not usually lowered or eliminated.

Impact on Credit Score

If you are in debt, any action you take will impact your credit score. If you enter into a debt management plan, it will appear on your credit report, although it will not affect your credit score. However, the actions taken as part of the plan might. For example, if any of your debt accounts are closed, it will impact the amount of credit you currently have available, which could negatively affect your credit score.

Filing bankruptcy will likely have a bigger effect on your credit score, but the impact will likely be shorter. Filing Chapter 7 may drop your credit score down to anywhere between 520 and 550. Still, in just two or three years, you can bring your score back up to one considered “excellent,” especially if you use the money management tips offered in the mandatory credit counseling course. A Chapter 7 bankruptcy will remain on your credit report for ten years.

A Chapter 13 bankruptcy will only remain on your credit report for seven years from the date you filed, if you complete the repayment plan. If you do not follow the repayment plan, the bankruptcy will remain on your credit score for ten years.

Our Bankruptcy Lawyer in Fort Lauderdale Can Help You Through the Process

Everyone struggles with financial problems sometimes and when you do, there are many options available. At Loan Lawyers, our Florida bankruptcy lawyer can advise on which option is right for you and help you through whichever process is most appropriate. When you are struggling with debt, call our Fort Lauderdale bankruptcy attorney at (954) 523-4357 or fill out our online form to schedule a free consultation and obtain the sound legal advice you need.