Debt Management Plans Versus Consumer Bankruptcy


If you are struggling to repay debts in Oak Park and are looking at different options, you may be considering debt management plans. In many cases, debt management plans are pitched as an alternative to consumer bankruptcy. However, according to an article in the Chicago Tribune, sometimes debt management plans might not be as workable or as affordable as they initially sound. When you are dealing with seemingly insurmountable debt, it is possible that a debt management plan is not the best option for you. Although these plans can be helpful to some people, in other situations, personal bankruptcy could be the better choice for helping you to get back on track.
How can you know whether a debt management plan or consumer bankruptcy is the right decision in your specific case?
Debt Management Plans Do Not Work for Everyone
How do debt management plans work? Typically, debtors will work with a credit counseling agency, and the agency will work out an agreement with credit card companies and other creditors. Then, the debtors will make payments directly to the credit counseling agency, which will then make payments to those creditors. Usually these types of debt consolidation, or debt management, plans allow debtors to have lower interest rates and lower fees. In addition, the total amount of the payment made each month to the credit counseling agency is often less than the total of all the other payments together (if the debtor had not gone to credit counseling). Over the course of four or five years, on average, the debtor will pay off what she or he owes.
When debtors in credit counseling make all of the required payments under their debt management plan and pay off their creditors over time, their credit scores are impacted less than they would be through, for example, bankruptcy. This might sound preferable to bankruptcy, but there are other factors to consider.
For instance, the article cites one older married couple that opted for credit counseling instead of bankruptcy at a time with the husband was terminally ill and the wife had to work overtime hours in order to make the debt management plan payments. As a result, she spent less time with her husband, who passed away shortly after she had repaid their debt (of about $120,000). Some consumer advocates contend that bankruptcy may have been a better solution in terms of affording that couple a higher quality of life.
Cons of Debt Management Plans
While debt management plans may be better for your credit score in the short term, there are drawbacks beyond the quality of life the debtors may have while they are working to repay loans. The article cites some of the following cons when it comes to debt consolidation, or debt management, plans:
  • Debt management agencies do not discuss the benefits of bankruptcy with debtors who are thinking about a debt management plan;
  • Most debt management plans cannot help with mortgages, auto loans, student loans, or medical debt;
  • Debtors will have access to very little, or no, credit during the repayment period of a debt management plan (which prevents the debtor from purchasing a new vehicle or refinancing a mortgage);
  • Even a single missed payment can result in a cancellation of the debt management plan; and
  • Payments on debt management plans can still be high, making it difficult and sometimes impossible for debtors to make the payments.
It is important to discuss your case with an Oak Park bankruptcy lawyer to learn more about your options. Contact the Emerson Law Firm today for more information.
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