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Bankruptcy alternatives—can they really help? P.2

In our last post, we briefly described several common bankruptcy alternatives, including debt credit counseling and debt management. As we noted, credit counseling is sometimes done in connection with debt management, which can be beneficial to some debtors. It is important for debtors to realize, though, that debt management plans are not workable for every debtor’s situation, nor is debt management always the most beneficial form of debt relief for every debtor.

Under a debt management plan, a debtor works with a counseling agency to pay off creditors, with the agency serving as a mediator. Counseling agencies are typically able to secure reduced interest rates, fees and payments, which makes the debt more manageable for the debtor. The repayment period varies, but can sometimes take four or five years. 

The benefit of pursuing a debt management plan for debt relief is that successful completion of a repayment plan has less of a negative impact on a debtor’s credit score. There are limitations and risks with debt management plans as well. A debtor must, for instance, have a regular income. Debt management doesn’t address certain forms of debt, including mortgages, medical bills, and student loan debt. Missing payments can result in cancellation of the plan.

Another drawback of debt management plans is that debtors may benefit more from bankruptcy, though a credit counselor will not necessarily alert a debtor to this fact. In some cases, bankruptcy may be a quicker and more painless way to address burdensome debt, particularly for those who cannot maintain a regular income

This isn’t to say that debtors should never pursue credit counseling and debt management plans, but only that pursuing alternatives to bankruptcy at any cost is necessarily the best way to obtain effective debt relief. Those who feel they could benefit from bankruptcy should consult an experienced attorney to look at their options and determine the best course of action.  

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