Debt Consolidation Versus Bankruptcy

A debt consolidation or frequently called debt management plan is a voluntary program to help clients resolve credit problems and pay debts through one monthly payment. The client typically pays their payment into a type of escrowed savings account and the servicer of the debt management plan will typically negotiate with creditors to attempt to lower interest rates, stop late and over-limit fees, lower monthly minimum payments and pay off debts in fewer than 5 years. The disadvantages of a debt management program are that the servicer cannot always guarantee that all creditors will engage in the plan, and at times the creditors will still pursue outside legal action against the client which will still create a need for a bankruptcy filing to protect money and property. Additionally, the creditors will still be reporting negative remarks on the client’s credit report during the debt management plan, as they are not receiving their regular monthly payments in a timely fashion.

While many people engage in debt management plans in order to avoid bankruptcy, many times they will still pursue bankruptcy at a later time due to issues with credit resolution and lawsuits during that plan. Chapter 7 bankruptcy can effectively discharge the debt in a 90-day period, provide legal protection and with Hoglund Law, our clients are enrolled in a program in order to rebuild their credit within 2 years. This is a much shorter time frame and much greater benefit than a debt management plan. If Chapter 7 is not an option, often times a Chapter 13 will still greatly benefit someone considering a debt management plan, as the client would only be required to pay their disposable income (what they can afford versus what they owe) into the plan over 3 or 5 years while offering them legal protection from creditors. Additionally, Chapter 13 clients are also enrolled in the credit repair program to ensure they will have a high credit score when they are done with their Chapter 13 bankruptcy.

Therefore, it is important to consult with a bankruptcy attorney who can assess your options to ensure protection and the best avenue to rebuilding credit. Under most circumstances, a debt management program is going to be a last resort in the event that bankruptcy is not beneficial to their situation.

Please contact Hoglund Law to set up a free consultation to go over all the options that may be available to you to handle your existing debt.

Written by Ann Hagerty

I have a passion for working directly with clients and helping them navigate difficult financial decisions. I love practicing in bankruptcy because it is one of the rare opportunities in life where someone can start fresh and free themselves of financial stress.

View all author posts →

Additional Related Articles

Legal Blog Expert