Dealing With Your Debt: Debt Management Plans Versus Bankruptcy

If you are grappling to stay on top of your debts, you are not alone. Household debt levels are at a record high and according to the U.S. Financial Health Pulse Report, only 29 percent of Americans consider themselves to be financially healthy. With a record number of Americans out of work, consumer bankruptcy filings are expected to increase. This comes as no surprise since 6 in 10 consumers say they feel overwhelmed by the burden of their debt. For many who are looking to resolve their unpaid loans, they have 2 options: a debt management plan or filing for bankruptcy. But how do you know which one is right for you? The best way to do this is to start by figuring out a few key differentiator of the two and what they may mean for your personal finances going forward.


The Costs Of A Debt Management Plan Vs Filing For Bankruptcy

Whether you choose a debt management plan or bankruptcy, you will incur costs along the way. Those that choose to file for bankruptcy can expect to pay filing fees, administrative fees, and attorney fees. These fees will differ according to your choice of filing as well. For instance, the cost of reopening a Chapter 13 filing is $235 while reopening a Chapter 7 filing costs $260.

On the other hand, those who choose a debt management plan will have to pay monthly fees, which can either be a fixed flat fee or a set percentage of your debt management plan. However, certain states do offer low-cost or free credit counseling services so it is worth checking out what the fees are in your state before deciding. Keep in mind that a debt management plan does not erase your debt but simply tries to make it more manageable for you to repay. Often this can look like getting creditors to waive late fees on payments or to reduce their interest rates. Most debt management plans aim to be repaid within 3 to 5 years, so if your debt plan is short-term it may work out cheaper than filing for bankruptcy.

The Income Factor In A Debt Management Plan and Bankruptcy Filing

It also helps you to do your research on the best bankruptcy filing option for your situation. For instance, compare chapter 11 vs chapter 13 for its suitability to your financial situation. Filing for Chapter 13 requires individuals to have a stable source of income. Therefore, if you are unemployed and filing on that basis with no prospect of future income, you may not qualify.

Similarly, you need to have a steady income stream for a debt management plan to work since you will be required to stick to a repayment plan and pay monthly fees. If you do not have any source of income, and no foreseeable plans for income in the future, filing for a Chapter 7 bankruptcy would be a better option.

The Qualification Process For Bankruptcy

While you may prefer one option over the other, this does not guarantee that you will be the ideal candidate for it. When filing for bankruptcy, an adjudicator can deny your application. This could be due to the presence of another option such as a debt management plan or debt relief order. For instance, some reasons for denying Chapter 7 Bankruptcies include the failure to attend credit counseling or the presence of evidence to support a Chapter 13 filing.

Also, each option is only suited to certain types of debts. Debt management plans only apply to unsecured debts such as credit card debts. If you have an auto loan, this would not qualify. With bankruptcy, you could still end up owing unsecured debts after settlement. For example, student loans are categorized as non-dischargeable debts.

Finally, each option has a different impact on your credit score. While a debt management plan affects your credit score, you can rebuild your score after completing the plan. Filing for bankruptcy has a severely negative impact on your credit file, even if it wipes out all of your debt. This is because it reflects on your payment history. It also stays on your credit file for 7 to 10 years. While debt management plans and bankruptcy filings each have their merits, the question remains: which one is the right fit for you?