Bankruptcy always wipes out debts; debt management often does not

The recently passed bankruptcy law has made a bit of a mess out of the problem debt industry. The credit card companies are happy with the law, which makes it somewhat harder to file for bankruptcy and which requires debt relief candidates to first enroll in a credit counseling program. The intention of the law, the most sweeping reform of American debt law in 25 years, was to reduce the number of consumers who file for bankruptcy and to increase the number who enroll in debt management programs.

A debt management program allows the credit counseling agency to negotiate a repayment schedule that is agreeable to both the creditor and the consumer. The consumer then pays off the agreed-upon amount over time, making payments directly to the counseling agency. In a bankruptcy filing, the consumer would hire an attorney to represent him or her in court and to negotiate either a repayment schedule or an elimination of all acquired debt.

There are some reasons why debt management is the better choice and some reasons why bankruptcy would make more sense. We will outline them below:

• In debt management, the agency receives a portion of the payments you make. They also receive a percentage of your debt from your creditors. As such, the agency has a mixed allegiance. They don’t exactly work for you; they have more incentive to make the creditors happy. 
• A bankruptcy attorney works for you. He or she has no vested interest in the outcome of your case and earns no payment other than the hourly rate that you agree to pay. There is no conflict of interest; the attorney has no relationship whatsoever with your creditors.
• Some credit counseling agencies keep your entire first payment, sending nothing to your creditors. This will further damage your credit score.
• A recent study shows that 97% of people who have filed for bankruptcy since the new law went into effect have qualified for debt relief. Only 3% had finances that were appropriate for enrolling in a debt management program.
• Another study shows that only one quarter of all consumers who enroll in a debt management program actually complete it. The remainder either end up filing for bankruptcy or simply default and disappear.

The smart debtor will spend the time to enroll in the short, but mandatory credit counseling program. That consumer will also take the time to at least consult with an attorney to see what he or she thinks might be the best course of action to take in your particular case. As all cases are different, there is no “one size fits all” solution. Some people will be better off filing for bankruptcy; others will be better for having made an attempt at a formal debt repayment plan. But the only way you will find out which works best for you is if you speak to professionals on both sides.

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