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Debt Consolidation, Debt Management Plan, or Bankruptcy? What You Need to Know

Debt Relief

Many people who are deep in debt may believe that bankruptcy is their only solution. But there are other options to explore. It is important to know the advantages and disadvantages of a debt management plan, debt consolidation, and bankruptcy to determine which choice is best for your situation.

Debt Management Plans

A debt management plan, or DMP, is a payment plan you and your creditors agree to through the assistance of a credit counseling organization.

The advantage of this type of plan is that a credit counselor helps you create a budget for all of your monthly expenses and then allocates the money left over to the creditors. Another advantage is that having a credit counselor as the mediator takes some of the stress and pressure off you while your counselor manages the allocation of funds and negotiates concessions with the lenders. Accounts in a DMP may be notated on your credit report as “credit counseling accounts.” The DMP notation is usually removed as soon as the DMP is completed.

One disadvantage to using a DMP is that your credit counseling agency often handles making payments on your behalf, and your credit score can be damaged if they do not make your payments on time, explains Fair Isaac Corporation (FICO), the company that created the credit score. It is therefore of utmost importance to work with a reputable counseling agency whom you can trust with your finances.

Debt Consolidation Loan

A debt consolidation loan is different from a debt management plan. Whereas you continue to make payments to each individual lender in a DMP, when you choose a loan, all of your separate debts are combined into one new loan with one payment.

The advantage here is that you can reduce your monthly payments into one lower, easier to manage payment. On the other hand, you may end up paying more in the long run because your consolidated loan may have a higher interest rate or have a long payoff period. Debt Consolidation Loans may also be difficult to qualify for.

Bankruptcy

A bankruptcy is a legal process where consumers as well as businesses can eliminate or repay some or all of their debts under the protection of the federal bankruptcy court. There are two types of personal bankruptcies: Chapter 7 is the liquidation of debt, and Chapter 13 is a reorganization of debt.

The advantage to filing for bankruptcy is that you will pay much less or nothing back to the lender through bankruptcy protection. The disadvantage is that it will have a huge negative impact on your credit report and will severely damage your credit score. According to Bankrate, a Chapter 7 filing will stay on your report for ten years from the date of filing, and a Chapter 13 will stay on your report for seven years.

Before filing for bankruptcy or doing a debt consolidation, contact a reputable and trusted credit counseling agency like CESI to speak with a counselor. Counseling from reputable agencies is always free and confidential. Make sure to explore the advantages and disadvantages of a DMP, consolidation, and bankruptcy with the counselor and then make an informed decision.

Since bankruptcy is a legal process, should you choose that route, you should consult with an experienced consumer-focused bankruptcy attorney after you and your counselor have worked out a plan.

By meeting with a credit counselor, you can talk through all your options and start taking control of your debt. Getting the proper guidance will help you make an informed decision as well as help you better manage your finances moving forward.

Image source: Flickr

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Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.


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