Bankruptcy or Debt Management Plan – Which is better?

The easy answer to this question is “it depends on the circumstances.”  And, on the surface, that is true.  But, there are some considerations that need to be examined in order to help understand the ramifications to both.

Debt Management Plans.  For those who are in trouble financially, debt management plans are the best method to use in order to work towards getting out of debt.  There are dozens of Credit Counseling organizations that can help those deep in debt to work out a plan to get out of debt.  The need to pay off debt must be faced instead of the desire just to get out of debt.  These companies specialize in not only working with creditors, but also in helping consumers face their debt problems and working on a budget to get them out.

These plans are better than bankruptcy because you get out of debt faster than you can endure the 10 year bankruptcy mark on your credit.  Also, as you get out of debt, your credit score and history will improve which will put you into a position to be able to obtain better rates on loans in the future.

Using a debt management plan does have fees associated with it in the form of money charges, but this is the most cost effective way to pay back debt.

Why bankruptcy?  For many who file for bankruptcy, the underlying forces have dictated the course of action.  Bankruptcy has a stigma attached to it from a credit standpoint that will follow a person for 10 years.  For that reason alone it can be argued that it should be used only as a last resort.  Divorce, medical bills and other catastrophic financial events often precipitate the need for bankruptcy.

What types?  For consumers there are only two types of bankruptcy.  Chapter 7 is designed to clean the slate of financial obligation with a few exceptions.  All unsecured debt is swept away.  Any secured debt is also wiped clean, but you must give up the secured item or items that were signed onto in the agreement.  In the case of a vehicle loan, you will have to turn in that vehicle as a part of the bankruptcy.  There are some debts that you cannot get rid of under Chapter 7.  These include tax debt, federal student loans and other federally-backed loans.

Chapter 13 is basically a re-payment plan based on the ability of the debtor as determined by the courts.  The payments are taken out of the debtors paychecks and automatically distributed to creditors.  Chapter 13 is not better than a debt management plan.  There are court costs and attorneys fees that need to be paid in addition to having to pay the money back through a garnishment order.

Getting out of debt is harder than getting into debt, but it must be pursued in order to get your finances back in shape and learn how to manage your money in a more responsible manner in the future.