Filing a Chapter 7 or Chapter 13 Bankruptcy petition can be ‘good medicine’ for those who are experiencing serious debt problems. However, many who would beneﬁt from ﬁling a bankruptcy petition instead attempt to resolve their debt problems by means of a Debt Management Plan or Debt Consolidation Plan because they believe the debt myths about the terrible consequences of ﬁling a bankruptcy petition.
Prior to retaining our Firm, many of our clients were persuaded to undertake these Plans without a full understanding of the fees to be paid and costs they were to be charged and a realistic assessment of the probability that the plans would be successful. Careful consideration to the following should be given by those considering a Debt Management Plan or Debt Consolidation
– Debt Consolidation Plans are offered by private companies which represent that they will create a plan which will enable individuals to pay off their credit card debt in less time than under their credit card agreements. Typically, these companies suggest that a Debt Management Plan will: reduce interest rates, waive late fees, lower monthly payments, and eliminate collection calls.
– Those who market Debt Management Plans suggest that the Plans will somehow “save your credit”. As a result, debtors who have a signiﬁcant balance owed on their credit cards, but are making only minimum monthly payments, are drawn to these Plans with suggestions that they will be able to both eliminate their credit card debt and preserve their credit.
It is FALSE that by making monthly payments under the Debt Management Plan, debtors’ accounts are considered current. The Debt Management Plan requires you to sign an agreement to close all open lines of credit and card accounts. Closing accounts with openbalances at the same time, especially multiple accounts, signiﬁcantly reduces your credit score. Once the accounts are closed, you will be unable to reopen them.
In most Debt Management Plans, the ﬁrst payments made are taken as fees and costs by the Debt Management company and not used to pay their creditors, and the credit scores of those who agree to these Plans see an immediate and signiﬁcant reduction in their credit score by the time they make their 2nd or 3rd payment under the Debt Management Plan.
Debt Management Plans do not protect you from lawsuits and other collection activities by creditors. Unless a Debt Management Plan explicitly states that you have retained an attorney licensed to practice in New Jersey to represent you in collection matters, Debt Management Plans do not mean you have retained an attorney or any other party to protect you from creditors suing you. If you have been sued in the past or a creditor refuses to participate in the Debt Management Plan, there is nothing in the Plan that would stop that creditor from ﬁling a law suit against you or, if successful in obtaining a Judgment, pursue post-Judgment collections such as wage garnishment or levying against the funds held in a bank account.