Lefkovitz & Lefkovitz
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Debt management plans (DMPs) vs. Chapter 7: Is one more ethical?

Most people struggling with serious debt will admit, under the right conditions, that it's stressful and horrible. They will do almost anything to escape the collections calls, threatening letters and constant fears and get to a place of economic peace. But what's the best way to do that? When is bankruptcy an appropriate move?

Many nonprofit credit counseling agencies offer debt management plans (DMPs) as an alternative to bankruptcy. Typically, DMPs offer the debtor structure and support, and a concrete plan to consolidate and pay off their debt within a few years. But are DMPs morally superior to Chapter 7 bankruptcy, which provides much more profound, long-lasting relief from unsecured debt?

DMPs don't work for many people

For debtors who insist on paying off all their debt -- and who actually have the income-expense profile to do it, which is a big IF -- a DMP may be a good idea. However, a 2011 article in credit.com, written in the aftermath of the Great Recession, suggested that the majority of individuals who enter initial credit counseling are not good candidates for DMPs. It offered some insight into what DMPs can and can't do for people who want to get out of debt:

  • They get a feeling of accomplishment that they've paid off all the debt yourself.
  • They tend to improve at budgeting and living a disciplined financial life.
  • They gain access to much lower interest rates and a respite from harsh late fees, which allows them to get out of debt faster.

The upside and downside of Chapter 7 bankruptcy 

Chapter 7 bankruptcy allows qualified filers to discharge -- to eradicate -- serious debt like credit card and medical debt. The collections efforts stop, and filers can get a fresh start. The cons of bankruptcy filing include a big, temporary hit to your credit and an inability to get more credit for a period of time.

Another con, for some people, is a feeling that they somehow cheated or compromised by not paying back their debts in full. Even though bankruptcy is codified in federal law and supported by the Constitution, and debts may be owed to large, impersonal corporations and not individuals -- and debt cancellation has a strong Old Testament precedent -- there a multiplicity of opinions on the subject. It can become an ethical conundrum, one that can be greatly complicated by the perspectives of well-meaning family members and friends.

You'll have to make your own choices about how to deal with your debt, but it will help to understand all your options. Make sure you talk to a professional if you are considering bankruptcy.

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