If you’re struggling with debt you may be exploring your options on how to get a handle on it. If you are considering entering into a “debt management plan,” read on to understand what such a plan may do for you and how bankruptcy may be a better alternative.
What is a Debt Management Plan?
A debt management plan is typically offered by a credit counseling agency and is a repayment plan for your debts. These plans most often are for credit card debt and are drawn out for many years. The agency’s goal is to work out a deal with your credit card companies, or other debtors, so that you can make payments over time, possibly with a lower interest rate or other reduced fees.
This doesn’t sound like a bad deal. However, beware…
Debt Management Plan vs. Bankruptcy
The truth is that debt management plans are often a worse solution than bankruptcy. There are a number of reasons why this is true.
Debt management plans are drawn out over many years, whereas a Chapter 7 bankruptcy is typically completed within 6-months. During the years you’re in a debt management plan you are still in debt, your credit score is still taking a hit, and you have no guarantee that the plan will actually handle all of your debt problems. After a successful bankruptcy filing you would be debt-free, and contrary to the myth, your credit score can begin to improve shortly after bankruptcy.
Second, the potential for failure.
If you enter into a debt management plan and you miss a payment your plan can be cancelled. This could land you worse off than you were before entering into the plan. If you’re already struggling to pay your bills, are you certain you can make the payment on your debt management plan month after month?
Debt management plans cost money. You would essentially be paying an agency to settle your debts for you, which you could actually do for yourself, and they take a cut of each payment which slows down how quickly you get out of debt.
If you were to erase your debts through bankruptcy, you would be able to direct these monthly payments into emergency savings or retirement fund. Both of which would leave you better off financially.
Explore your options.
Explore all of your debt relief options before entering into a debt management plan. This includes consulting with a bankruptcy attorney. Many offer free consultations – so it won’t cost you anything to get all of the information you need to make the best decision for you and your family.
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