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Most debt management plans are not completed

On Behalf of | Nov 2, 2016 | Bankruptcy

Virginia residents struggling to cope with unmanageable bills sometimes see debt management plans as a way to pay off their debts while maintaining their credit scores, but research indicates that 40 to 45 percent of these plans is abandoned long before they are completed. When developing debt management plans, credit counselors urge creditors to reduce their rates and minimum payments in return for an assurance that debts will be paid off fully over a three- to five-year period.

Debtors are often forced to abandon debt management plans because unexpected setbacks have left them unable to make the required payments. These plans often allow individuals little or no disposable income to prepare for emergencies, and accidents or layoffs may make it impossible to carry out the debt management plan.

Another problem with these plans is that they may actually cause credit scores to go down rather than rise. This is because closing credit accounts may skew debt ratio calculations and lower the chances of new credit being issued. Individuals thinking of taking this path are advised by experts to budget carefully and to save diligently.

Bankruptcy is often viewed as the last resort by Virginia residents seeking relief from overwhelming debt, but a Chapter 7 or a Chapter 13 filing offers some benefits that debt management plans or credit counseling do not. Attorneys experienced in this area could explain how the various forms of debt relief differ, and they may not suggest a bankruptcy filing for all individuals with overwhelming debt. However, they could also point out that the goal of the bankruptcy laws is to protect individuals and companies from creditor harassment and offer them the possibility of a fresh financial start.