Debt Management vs Chapter 13
Which is Best?
When Debt Management is Better Than Bankruptcy
If you are treading water, not making any headway on your bills and want to get out of debt, consider a debt management plan. These plans do work. And, sometimes, I recommend them over a bankruptcy option. When you have sufficient income to fund a DMP (Debt Management Plan), and don’t mind the damage that “not paid as agreed” will do to your credit, this program may be for you.
If you are having a hard time keeping your payments made, and barely making it every month, or are behind, then a Chapter 13 may be a better solution.
What Kinds of Debts Can I Put in a Debt Management Plan or Chapter 13
Very different answers here in debt management vs. Chapter 13. In a DMP, you can only include unsecured debts, mainly your credit cards. You can’t include cars or house debts. You can “pick and choose” what debts you want to include and which you want to keep out.
Creditors may refuse to participate in your DMP. Since all DMP’s are voluntary, no creditor can be forced to participate. Some creditors will not, as a rule, participate. American Express will not, as a rule, participate.
If you do elect to keep some debts out, however there is no guarantee that the credit cards you do not include will remain open and available for you. Because once you get into a DMP, you’ll get behind on some debts, and that may trigger other account closures.
In a Chapter 13, you MUST include ALL debts. You can’t omit any bills “out of the plan.” So, even if you are not behind on your car, for example, it has to be included. This may not be a bad thing, depending on your car loan, since the interest rate on the car loan will change to about 5.5% in a Chapter 13 plan. The only debt you can exclude from a Chapter 13 is your home mortgage, if you are current on it.
Creditors must participate (even American Express)! They can’t “opt out” of your Chapter 13, unlike the DMP.
How Much Will I Pay in a Debt Management Plan vs Chapter 13?
I’ve seen consolidation loans turn into disasters for my clients. The worst kind of consolidation loan is the HELOC. This is a Home Equity Line Of Credit. This is actually a second mortgage on your home, but the lenders don’t like to scare you with the “M” word. A “MORTGAGE” is scary. But a HELOC sounds less so. Many people who get HELOCs do not understand that they are mortgaging their home.
If you later need to discharge debt in bankruptcy, the HELOC will normally not be able to be discharged, because you have secured it with your home! You HAVE to pay this back. So, whatever you do, please DO NOT GET A HELOC. When faced with debt consolidation vs bankruptcy, avoid the HELOC.
When you’re considering different options for debt relief, it’s helpful to talk with someone who is trained and certified, and has decades of experience in all the different options. Richard West is trained, and certified and experienced in all debt relief options. He’ll make sure you know what not to do, as well.
Call West Law Office for a free consultation. We offer in-office, video and telephone appointments. We’ll help with the debt consolidation vs bankruptcy decision.
Debt management plans are voluntary, and there is no federal law which dictates how much you have to pay them, or how much they have to lower your balance or monthly payment. It’s totally open to negotiations.
Chapter 13, by contrast, is governed by Federal Bankruptcy Law. The percentage you pay in a Chapter 13 might be as low as 0%. I file these 0% Chapter 13 cases regularly. Or, the percentage may be as much as 100%. But this is only the principal. All of the credit cards and other unsecured debt gets ZERO interest in a chapter 13. In some cases, the interest savings alone makes the Chapter 13 a financially better solution.
Chapter 13 can do more than a DMP. Car debt can be reduced, as well as the interest rate on car loans.
Dmp’s provide no protection from creditors, while a chapter 13 does.
The length of time that you are in a DMP is often advertised to be less than a Chapter 13, but in my decades of experience, I see too many people come to me after spending years in a DMP, and then decide it was the wrong plan.
When considering which debt reduction plan to use, check with an attorney who is trained, certified and experienced in BOTH DMP and bankruptcy. Since I am fully experienced in all options, I can give you an objective and honest comparison of the differences. That way you’ll know you have the best solution.
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Here are two helpful calculators for managing your debt repayments and Chapter 13 commitments.