Debt Management & Bankruptcy
Bankruptcy allows a debtor to begin fresh, either by discharging eligible debts completely or consolidating the debts into a payment plan that is spread out up to five years. Debt management programs attempt to create a debt management plan without the debtor resorting to bankruptcy. Bankruptcies and debt management plans have different effects on your credit score.
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Debt Management
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Debt management plans, also known as DMPs, are created by a credit counseling agency to provide you with a manageable way to pay your debts. The credit counselor creates this plan with the agreement from each creditor that you are including in the plan. You can have many different types of debt included in the plan, and you make one payment to the debt management company. The company then sends the negotiated payments to each of your creditors.
Bankruptcy Chapters
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The two most common consumer bankruptcy chapters are Chapter 7 and Chapter 13. Chapter 7 bankruptcy provides the debtor with a way to discharge almost all debts. Chapter 13 is similar to a debt management program, where the debts in the bankruptcy are put into a payment plan and slowly paid over time to the creditors, with one payment.
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Effect on Credit
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When you file for a bankruptcy or enter into a debt management plan, each account included in bankruptcy or the plan is marked with a notation indicating that. According to Bankrate.com, although accounts are marked as being under DMP, the plan itself does not have an adverse effect on your credit. Bankruptcies, no matter which chapter, are highly detrimental to your credit score, and it takes seven to 10 years before the bankruptcy is removed. DMPs are not completely free of bad credit effects. If you waited until you are several months late prior to entering the program, these negative notations bring down your credit. Likewise, if your management company does not pay the creditors on time, you will receive late payment notations.
Re-Establishing Credit
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Once you have completed a DMP or attained a discharge from bankruptcy, you can re-establish your credit. Getting credit after a debt management plan is generally easier than attaining credit post bankruptcy. Some credit companies do cater to post-bankruptcy borrowers, however. When you get a credit account after counseling or bankruptcy, the positive credit account begins to mitigate the damage done by the bankruptcy or the late payments.
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