Posts Tagged ‘Chapter 7’

These days, for whatever reason, it seems that we’re hearing more about people falling behind on their debts. With household money tightening up, people are being selective about who to repay. If you’re in that boat (and it’s probably a pretty big boat), you may have heard on the radio, or television, or the internets about Debt Management Plans.

Simply put, a debt management plan is this: A plan (offered by a credit counseling agency) to repay your credit cards and bring your debt down to zero in approximately 5 years. You don’t have to file for bankruptcy. You can start rebuilding your credit immediately. Sounds like a pretty good deal? Maybe it is. But maybe a debt management plan isn’t right for you. And maybe a chapter 7 or chapter 13 bankruptcy offers a better (economic) deal for you.

First, let’s evaluate whether a debt management plan is a good deal (for you). It’s certainly a good deal for the credit card companies. After all, they’re still collecting some interest on your balances (although nowhere near the 30% default rate; more likely closer to something around 9-10%). It is also a good deal for the credit counseling agency. They are likely collecting around a 10% fee with each payment you submit.

But where’s the benefit for you, the debtor? Like I said earlier, you begin to start rebuilding your credit. But if you can’t meet the responsibilities of the plan, it could impact your credit negatively again. And maybe you’re fulfilling your own personal moral obligation to repay your debts.

If considering a debt management plan, the debtor should also consider bankruptcy before committing to anything.

For a fraction of what it would cost in debt management plan maintenance fees (the roughly 10% that the credit counseling agency charges for administering the plan) the debtor could file for bankruptcy. In addition, the total out of pocket cost will most often be significantly less than what you would pay through a debt management plan.

Think of it this way: In a typical chapter 7 case, the debtor’s only monetary costs are the attorney fees and the court filing fees. Plus a chapter 7 bankruptcy generally takes 4-6 months, and allows the debtor to begin rebuilding his or her credit a lot sooner than the debt management plan.

In a chapter 13 bankruptcy, the debtor is still paying through a payment plan, similar to that of a debt management plan. However, the amount the debtor pays per month is often quite less than the amount credit counseling agencies require to complete a debt management plan. Plus the chapter 13 plan can provide for some secured debt and tax debt, items that the debt management plan doesn’t consider.

Bottom line: If you’re thinking of a debt management plan, talk to a bankruptcy attorney who can help you evaluate your options.