Chapter 13 Bankruptcy vs. Debt Management Programs

Dealing with high interest credit cards, medical bills and late car payments can be very stressful. You may feel as if you are on some sinister payment treadmill that you will never escape from. You may have been advised to consider bankruptcy, but at the same time, you are bombarded by commercials from debt settlement (and credit management) companies telling you to avoid it.

This article will highlight the basic differences between Chapter 13 bankruptcy and debt management plans along with the pros and cons of each.

Chapter 13 bankruptcy is commonly referred to as "wage-earner's bankruptcy and involves the consolidation of all debts into an affordable monthly payment plan. Through Chapter 13 bankruptcies, unsecured debts, such as medical bills and credit cards are paid back over time (usually 36 months) at a fraction of the outstanding balance, with the remainder of the debt wiped out after the plan is completed. You are also allowed to keep the collateral on secured debts, such as a car or a home, while making payments on outstanding debt.

The primary benefit of Chapter 13 bankruptcy is that once the plan is completed, all remaining debt is discharged. You are no longer legally obligated to pay the debt, and you are given a fresh financial start. Bankruptcy also allows you the following benefits:

  • An automatic stay, where all collection actions stop (including foreclosures, garnishments, and repossessions)
  • A legally binding agreement that keeps creditors from seeking payment on debts that have been discharged.

A credit management company reviews your finances and negotiates a payment plan with your creditors based on your outstanding debt and current income. The company will also help you determine if paying the debt through a debt management plan would be in your best interests. The benefits of a debt management plan include:

  • You would still be able to use the credit you still have available as you pay down your debt.
  • You only have to include the debts you are struggling with in the plan.
  • Late fees and over-the-limit fees may stop.
  • You avoid having to file for bankruptcy.
  • The payment plan does not negatively affect your credit score.

There are several drawbacks to debt management plans, which include:

  • Higher monthly payments compared to a Chapter 13 plan. Under Chapter 13, you are paying back a fraction of the debt, but the entire debt is repaid through a debt management plan.
  • A longer period of time until your debt is repaid. With a longer repayment plan, the greater the risk of not being able to complete the entire plan.
  • Creditors may not accept the plan proposed by your credit management company, leading to higher balances and fees.
  • Debt management plans (like Chapter 13 bankruptcies) are also reported to credit reporting agencies.

Ultimately, both methods can help in reducing debt, but consumers enjoy more protections under the bankruptcy code than through credit management companies. The preceding is not meant to be construed as legal advice. If you have questions about whether bankruptcy is appropriate for your situation, consult an experienced bankruptcy attorney.