Debt Management Plans: A Viable Alternative to Bankruptcy?
Unfortunately, the debt relief industry is filled with scammers looking to make money off of people who are deep in debt and desperate for a way out. However, there are reputable nonprofit credit counseling services out there that will evaluate your current financial situation, explain the debt relief options available to you, and more often than not offer you a debt management plan. While debt management plans can sometimes operate as a viable alternative to bankruptcy, credit counseling services sometimes fail to fully explain the benefits of filing for bankruptcy to their clients. Therefore, before signing a debt management plan with a credit counseling service be sure to consult with an experienced debt relief lawyer who can explain your legal options to you.
What are Debt Management Plans?
Credit counseling services often advertise their debt management plans as an alternative to bankruptcy for debtors who have a significant amount of credit card debt. An article from Nerdwallet explains that under a debt management plan the debtor generally makes payments to the credit counseling agency which in turn pays the debtor’s creditors. The article also notes that debt management plans will not reduce the original amount that the debtor owes, but can be helpful as credit counselors are often able to negotiate lower interest rates, have fees waived, and stretch out the time frame for repayment. These benefits are made possible thanks to standing agreements that credit counseling services often have with credit card companies. If a debtor is able to keep up with their debt management plan then eventually their original debt will be paid off and their credit score will likely be in much better shape than it would have been after filing for bankruptcy.
Issues Commonly Associated with Debt Management Plans
A recent article in the Chicago Tribune tackled the question whether debt management plans work. The article notes that there are several issues commonly associated with debt management plans that go beyond the fact that credit counseling services often fail to fully disclose the potential benefits of filing for bankruptcy protection. These issues include:
- – Debt management plans are generally designed to deal with credit card debt, and are not often equipped to address other types of debt such as mortgages, student loans, and car loans,
- – Under debt management plans the debtor is generally required to live without a credit card while under the plan, and
- – If the debtor misses a payment he or she will likely be hit with additional fees, increased interest rates, and their debt payment plan may be cancelled.
Differences Between Debt Management Plans and Filing for Bankruptcy
While debt management plans can be a great option for some people, borrowers should be aware that for others bankruptcy represents a faster and less expensive option. The Chicago Tribune reports that a typical debt management plan requires the debtor to repay thousands of dollars over several years. On the other hand, debtors who file for Chapter 7 bankruptcy can have most of their consumer debt erased within a few months for only a couple thousand dollars. However, it is important to keep in mind that every situation is different and that while entering into a debt management plan may be a good move for one person, filing for bankruptcy may be a better option for someone else. Therefore, always make sure to consult with a competent debt relief lawyer before signing anything.
Need Legal Advice?
If you live in Chicago and are trying to decide whether to enter into a debt management plan or file for bankruptcy, contact the Bentz Holguin Law Firm, LLC today to discuss your legal options. Schedule a free consultation with an experienced debt relief lawyer by calling 312-647-2116.