Navigating the complexities of a personal financial crisis can be a stressful process that can leave you feeling overwhelmed as you try to regain financial stability. There are a few options to consider when creating a financial plan that will help get you out of debt. Although bankruptcy can help relieve the financial burden, the possible stigma and damage to your credit score might make you hesitant. A debt management plan is another option to consider.
What is a Debt Management Plan?
Debt management plans (DMP) are programs offered by credit counselors to help regain control of unsecured debts. DMPs require debtors to make monthly payments to a counseling agency, which will disburse it to the debtor’s creditors.
To begin a DMP, a debtor must gather details on their accounts and outstanding debts and provide them to a credit counselor. The counselor will then reach out to creditors on behalf of the debtor to negotiate a new monthly payment. The counselor may also try to minimize interest rates and fees that might otherwise be levied against outstanding debts. Finally, the debtor will agree to pay the credit counselor monthly over a pre-determined period to pay off the debts.
What are the Differences Between Chapter 13 Bankruptcy and Debt Management Plans?
There are significant differences between filing for chapter 13 bankruptcy and using a debt management plan.
Generally speaking, Chapter 13 plans and DMPs take very different approaches to determine how much you must pay to be successful in the process. The starting point for determining how much your payment will be in a DMP is how much debt you have that agrees to be addressed in the plan. The higher the debt, the higher the DMP payment. However, Chapter 13 plan payment use the starting point of your disposable income to determine how much your plan payment will be. It is not driven by how much debt you have. Disposable income is defined as your net income minus your reasonable living expenses. The income that remains is what is devoted to the Chapter 13 payment plan.
Although DMPs may not have the same negative stigma as a bankruptcy plan, it is important to understand that filing for bankruptcy grants legal protections that a DMP does not. Debtors who file Chapter 13 bankruptcy are protected by an “automatic stay” which prohibits creditors from attempting to collect outstanding debts.
It is important to keep in mind that DMPs are voluntary plans and creditors can still pursue other avenues of collection like obtaining judgments at the same time they are receiving payments from a DMP. Creditors can also choose not to participate at all, meaning you still have part of your financial issue to solve on your own at the same time you are in the DMP.
Additionally, debts may be forgiven during the Chapter 13 bankruptcy process. This debt forgiveness is called a discharge. Not all debts are eligible to be discharged, and Chapter 13 bankruptcy requires the debtor to completely pay debts such as child support
DMPs only cover unsecured debts such as credit cards and medical bills. Mortgages, income taxes, and car loans, which could be included in repayment agreements under a Chapter 13 bankruptcy, are not eligible using DMP.
Consult a Skilled Minnesota Bankruptcy Attorney
Choosing the right debt solution can be a daunting task, but you do not have to do it alone. If you are experiencing financial hardship in the Twin Cities, Minneapolis, and St. Paul communities, Martin and Hedervare PLLC can help. Call us at (651) 243-2974 or contact us online today to schedule a consultation.