Debt Management versus Bankruptcy

Debt Management Versus Bankruptcy

Like many credit card holders, you may be carrying high balances on several credit cards and are looking for a way to get some financial relief. You may have tried everything you can to reduce your debt but to no avail, so you may believe that bankruptcy is your only option.  While it is certainly a viable debt relief option that can provide you with a fresh start, bankruptcy should be considered as the solution of last resort because of the lasting impact it will have on your credit report. There are other debt relief options available such as, a debt management plan, which typically allows you to combine all your credit card and unsecured debts into one affordable payment made to a credit counseling agency. In this document, we compare two debt relief options, debt management versus bankruptcy, to examine the benefits and drawbacks of each.

debt management versus bankruptcy

Debt management versus bankruptcy, which one should I choose?

The following comparison between the two will show that those who qualify for a debt management program have the potential to return to financial stability a lot sooner than those who filed for bankruptcy.

Debt Managements Plans

debt management pros and cons

This option has become a very popular alternative to bankruptcy, which has a more devastating and longer lasting impact on one’s credit.

A Debt Management Plan (DMP) is a plan to help you pay your debts and regain financial stability in less time than if you were doing it on your own. A credit counselor works with the creditors to reduce your interest rates, eliminate excessive fees, and put an end to collections.

Since the purpose of a DMP is to help you get out of debt, you should not incur any additional debt while you are in the program. If you use credit cards or department store cards, you could be disqualified from the program by your creditor you would lose all the benefits they have provided for you.

It takes approximately 36-60 months to repay debts through a debt management plan. But over this time you would have repaid debts, and the creditors would have received all the money they are owed.

Seek the advice of a professional debt relief counselor as a first step, and if appropriate, entering into a Debt Management Plan can start you on the road to financial stability.

The Benefits of a Debt Management Program are as follows

  • Reduced monthly debt payments. A DMP reduces monthly payments usually to between 30 – 50%
  • One monthly payment. You only have to make one payment on all debts included in the program.
  • Eliminate penalties and waive fees. Your credit counselor can negotiate with your creditor on your behalf to waive penalty interest rates and penalty fees applied to your accounts.
  • Get out of debt faster. Even though you pay less each month for all the debts in your DMP, you still get out of debt faster because the reduced interest rates allow you to pay less in accrued interest.
  • Help your credit. A successful completion of a debt management program allows you to build a positive credit history while reducing your total debt.


bankruptcy, advantages and drawbacks

Under bankruptcy protection, you may eliminate or restructure certain debts. The most common types of bankruptcy cases that individuals files are Chapter 7 and Chapter 13. A Chapter 7 bankruptcy case allows you to eliminate many types of debt. A Chapter 13 bankruptcy case allows you to restructure your debts through a supervised repayment plan. The bankruptcy “means test” will determine whether you qualify for Chapter 7 bankruptcy.


  • Protection from creditors.When you file for bankruptcy, you get the protection of the automatic stay, which prohibits most creditors and collectors from engaging in collection activity against you. The automatic stay has the power to stop harassing phone calls, lawsuits, garnishments, repossessions, and foreclosures.
  • You get a fresh start. Through a Chapter 7 bankruptcy case, you may eliminate most unsecured debt such as medical bills and credit cards. You may also surrender real estate or vehicles that you have financed if you don’t want to keep those debts.


  • Negative impact on credit rating. A bankruptcy filing lowers your credit score. Depending on the type of bankruptcy case you file, the filing may stay on your credit report for seven to ten years.
  • You may have to make some sacrifices. You may have to make some sacrifices to qualify for bankruptcy, such as surrendering nonessential or luxury possessions. Also, if you file a Chapter 13 bankruptcy case, you will be on a strict budget for three to five years, and you can’t obtain credit during that time without the court’s permission.
  • Privacy and reputation. Your employer may learn about your bankruptcy case if you permit it to pull your credit report, or if your Chapter 13 Plan payments go through payroll deductions. But, as a practical matter, your family and friends are unlikely to find out you’ve filed bankruptcy unless you owe them money.

Debt management versus bankruptcy, which one should I choose?

Debt management versus bankruptcy clearly shows that debt management trumps bankruptcy because bankruptcy will cause the most damage to your credit report since they remain on the report for between 7 and ten years. Debt Manage programs, on the other hand, have little or no impact on your credit report.

You should seek the advice of a debt relief professional or consult a bankruptcy lawyer before you proceed.

You may qualify for a debt management plan that would allow you to repay your debt with an affordable monthly payment that would not damage your credit like bankruptcy. Click the following button to get a free consultation.

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I hope you find this article interesting. If you have any questions or need additional information leave a comment below and I will respond.

4 Replies to “Debt Management versus Bankruptcy”

  1. This is great and right on time for me to read. I am currently going into my last year of college. This is just what I need to see. To teach me what my teachers didn’t. I will share this post with a few of my buddies so they can see it also. Thank you so much you have a lot of useful information here. Keep it up.

    1. Thank you for your comment. If you have further questions feel free to forward them and I will respond. Thanks again.

  2. Thanks for this article. I have been struggling with debt for many years now. The main reason was dropping down to a single income family after having kids. It is nice to know there are options available to set up a debt management plan, rather than declaring bankruptcy. That would be the absolute late resort for me. Thanks again!

    1. Thank you for the comments Andrew. You are right, bankruptcy should not be the first option for those struggling with debt. There are other options available.

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