Bankruptcy vs Debt Management Plan: What’s Best for Your Circumstances?

Filing for bankruptcy is a big decision. Even if you’re aware that it’s in your best interests to speak with a Brooklyn bankruptcy lawyer, you might still be hesitant because of the stigma and potential long-term consequences. As a result, you might be looking into a debt management plan instead. 

If you are struggling to pay your bills, it’s important to get all the facts. While a debt management plan can help you get out of debt, it’s not for everyone. Bankruptcy might still be your best option. 

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 back control over your debt. You’ll make a monthly payment to the credit counseling agency, and this payment is then spread across your creditors. 

Here is a brief rundown on how the process works: 

  • Give your credit counselor information on your accounts
  • The credit counselor negotiates with your creditors to take a certain amount each month rather than your regular payments 
  • Each month, you make one payment to the counseling agency to pay off your debts 

Sounds easy enough, right? It can be! But it’s also possible that filing for bankruptcy is best for your situation. Let’s compare the two. 

DMPs vs Bankruptcy: What are the Key Differences? 

Filing for bankruptcy at the right time can work in your favor and avoid certain consequences. Let’s look at how a debt management plan compares to Chapter 7 bankruptcy (straight bankruptcy that forgives debt) and Chapter 13 bankruptcy (payment plan that lasts 3-5 years). 

Length of Time 

DMP payments generally last for five years. Chapter 7 bankruptcy forgives most debts, though you’ll have to work through the process which can take up to six months. Payment plans for Chapter 13 are usually three to five years. 

Debts Forgiven 

DMPs do not forgive any of your debts. You are still responsible for paying them, though the creditors may reduce your interest and forgive late fees. With both Chapter 7 and Chapter 13, your debts are forgiven. However, your Brooklyn bankruptcy lawyer will notify you of debts you still need to pay like past-due child support and recent taxes. 

Protection from Creditors 

Only Chapter 7 and Chapter 13 bankruptcy protects you from the creditors. As soon as you file, an automatic stay springs into action to limit creditor activity. Unfortunately, DMPs do not protect you from the creditors. 

Credit Score Impact 

Bankruptcy has a sizable effect on your credit score depending on where you’re starting from. Plus, Chapter 7 stays on your credit record for 10 years and Chapter 13 stays on for seven years if you complete the plan (otherwise it’s ten). DMPs are not factored into your credit score, though it is documented on your credit report. 

Included Debts 

The type of debt that’s holding you back influences the type of plan you should follow. DMPs only cover unsecured debts like credit cards and medical bills. It does not cover mortgages, car loans, student debt, taxes, child support or alimony. With Chapter 7 and Chapter 13, most debts are discharged, though some are not. You’ll have to continue making payments on your home and car if you want to keep them. 

Eligibility Requirements

You do not need to meet any eligibility criteria to start a debt management plan. As for Chapter 7, you will need to pass a means test. You will pass this test as long as your income (minus certain expenses) is lower than the median income for your state. This prevents high-wage earners from filing. There is no means test for Chapter 13, though your payment plan must be feasible for your income and expenses. 

Brooklyn Bankruptcy Lawyer: Where to Find Help 

If you’re interested in a debt management plan, look for a nonprofit credit counseling agency in your area to help. Do your homework as not all agencies are created equal. If you’d prefer to learn more about filing for bankruptcy, contact a Brooklyn bankruptcy lawyer from Midtown Bankruptcy. 

 

Our New York bankruptcy offices work with people every day who are in your situation. We offer free consultations, giving us a chance to learn about your circumstances and how to improve them. If we don’t think that bankruptcy is right for you, we’ll let you know. Honesty and transparency is important to us, especially as we’re dealing with people’s livelihoods. 

 

Bankruptcy isn’t easy, but there are many advantages to filing and taking back your life. It’s one of the most powerful debt relief options out there, giving people a clean slate by erasing their debts and getting them out of poverty. To schedule a free, no obligation consultation with a bankruptcy attorney, contact Midtown Bankruptcy today. 

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