When you have serious debt problems, you may be considering multiple options to help with the issue. Both debt management plans and bankruptcy can help you get out of your current situation. While it may be more difficult to use a debt management plan because you have to make your payments, it can save your credit when compared to a bankruptcy.
Function
A debt management plan is a plan that you can set up or access through a private company. Many companies offer debt management plans and charge a monthly fee for the service. With this type of plan, your interest rates are lowered and you then make a monthly payment to your creditors. With bankruptcy, you can get your debts eliminated or set up a payment plan with the court to repay your creditors depending on what type of bankruptcy you choose.
Repaying the Debt
With a debt management plan, you still pay all of the money that you owe. Even though you get some help with lower interest rates and making a single monthly payment to the debt management plan operator, you still repay the debt in its entirety. With a bankruptcy, you would not necessarily have to repay your debts. With Chapter 7 bankruptcy, you get most of your debts forgiven and a fresh start.
Bankruptcy Impact
When you file for bankruptcy, it will have a significant effect on your credit score. When you file bankruptcy, it will remain on your credit report for around 10 years. Every time you try to obtain credit during this period, creditors will evaluate you negatively. With Chapter 7 bankruptcy, you would not have to repay your debts, which means that you did not live up to your end of the initial agreement with your creditors.
Debt Management Plan Impact
The impact of a debt management plan on your credit is negligible. If you sign up with a reputable debt management plan, it should make your payments on time for you every month. If your debt management plan administrator does not make your payments on time, then your creditor could report the payments late. Other than that risk, creditors do not mind the fact that you are taking the necessary steps to get out of debt.
Considerations
If you can afford to make the monthly payments, the debt management plan would be the better option to choose. If you are in deep over your head and cannot afford to make any monthly payments, bankruptcy might be your only option. Just be prepared to deal with a low credit score for a number of years while you build it back up again. Bankruptcy will have much longer consequences to deal with.
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