Bankruptcy vs. a Debt Management Plan in Pennsylvania: What Each One Does Legally

Short answer: A debt management plan (DMP) is a voluntary arrangement in which a credit counseling agency collects one monthly payment from you and sends it to your unsecured creditors, usually at reduced interest, and you repay the debt in full. Bankruptcy under Chapter 7 or Chapter 13 is a court case that brings an automatic stay when it is filed and, if the case is completed, a discharge of covered debts. The two are different tools for different problems, and a counseling session can come before either. An attorney can confirm how this applies to your case.

This page compares the legal effect of each path. For a general overview of DMPs, see debt management plans: how they work and who they help; for the settlement alternative, see credit counseling vs. debt settlement and our bankruptcy vs. debt settlement comparison.

What each one does legally

Bankruptcy has a statutory stay. Under 11 U.S.C. § 362(a), a bankruptcy petition "operates as a stay, applicable to all entities," of, among other things, the commencement or continuation of judicial proceedings (§ 362(a)(1)), "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case" (§ 362(a)(6)), and acts to enforce a lien against property of the debtor (§ 362(a)(5)). The stay has exceptions and can be lifted on a creditor's motion, and it is limited in some repeat filings under § 362(c). See our articles on the automatic stay and the stay in Chapter 7.

A DMP has no automatic stay. Nothing in a DMP puts a court order between you and your creditors. The plan works only because creditors agree to the terms. The Consumer Financial Protection Bureau advises that if you choose a DMP, you should "confirm that they have accepted the proposed plan before you send any payments." Whether a particular creditor pauses collection, and for how long, depends on that creditor. An attorney can confirm what protection, if any, applies to a lawsuit or garnishment you already face; see wage garnishment in Pennsylvania.

Bankruptcy can end personal liability; a DMP does not. In Chapter 7, 11 U.S.C. § 727(b) provides that a discharge "discharges the debtor from all debts that arose before the date of the order for relief," subject to the exceptions in § 523 (see nondischargeable debts). In Chapter 13, § 1328(a) directs the court to grant a discharge "as soon as practicable after completion by the debtor of all payments under the plan," again subject to listed exceptions. A DMP is the opposite design: the CFPB says a DMP "typically lowers your monthly payments to creditors as well as lowers interest charges and fees," but it is a repayment program, and credit counselors, the CFPB notes, "can't erase your debts."

Which debts each one covers

The Federal Trade Commission describes a DMP as using your monthly deposits to "pay your unsecured debts, like your credit card bills, student loans, and medical bills." The National Foundation for Credit Counseling (NFCC) says a DMP covers "your unsecured debt (mainly, credit cards)" and that "Loans typically can't be included in your plan." Which accounts an agency can include depends on the agency and on each creditor's participation.

A DMP does not deal with a mortgage default, a car loan in default, or a tax claim as such. Bankruptcy reaches further. A Chapter 13 plan may "provide for the curing of any default within a reasonable time" (§ 1322(b)(5)) and must provide for full payment of priority claims (§ 1322(a)(2)). That is why homeowners facing a sheriff's sale often look at Chapter 13 rather than a DMP; a default generally can be cured only if the plan is filed before the sale takes place (see § 1322(c)(1): a default "may be cured" "until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law"); see the sheriff's sale timeline and stopping a repossession. Chapter 7 and Chapter 13 each have eligibility rules, so which one fits is a question for an attorney; the Chapter 13 vs. Chapter 7 page is a starting point.

Timeline

The NFCC says DMP payments run for "anywhere from 36 to 60 months," and elsewhere describes the arrangement as requiring "a 3-5 year commitment." The FTC's guide to choosing a credit counselor is more cautious: "it could take 48 months or more to complete your DMP," and it tells consumers to ask the counselor for an estimate. So a DMP commonly runs about five years or somewhat less, and your own length depends on your balances, the interest rates creditors agree to, and what you can pay each month.

Bankruptcy timelines differ by chapter. A Chapter 13 plan is capped by statute: § 1322(d)(1) says the plan "may not provide for payments over a period that is longer than 5 years" for above-median-income debtors, and § 1322(d)(2) sets 3 years for below-median-income debtors unless the court approves a longer period for cause, not beyond 5 years. Chapter 7 does not involve a payment plan; our Chapter 7 overview walks through the case.

Costs, described without numbers

Both paths cost money, and the costs are of different kinds. The CFPB notes that "credit counseling organizations are permitted to charge you fees for their services," and advises asking: "Are there set-up or monthly fees? Get a specific price quote in writing." In bankruptcy, there is a court filing fee set by the court and attorney fees. We do not quote fees on this page; see the court fee schedule at uscourts.gov, and ask any agency or attorney for a written quote before you commit.

Effect on credit

Neither path is credit-neutral. The NFCC says the "Initial impact to credit scores can be negative" with a DMP and the long-term impact can be positive, while bankruptcy has a "Major negative impact on your credit scores," with Chapter 7 remaining on credit reports for 10 years and Chapter 13 for 7 years, per its description. The FTC says "Bankruptcy information stays on your credit report for 10 years" and that "Most negative information will stay on your report for seven years" (FTC, Fixing Your Credit FAQs). The NFCC's 7-year figure for Chapter 13 and the FTC's 10-year figure for bankruptcy information differ, so ask an attorney how your own case would be reported. Actual effects vary by person; see how long bankruptcy stays on your credit report, Chapter 7 and credit and Chapter 13 and credit.

How counseling interacts with the bankruptcy requirement

Under 11 U.S.C. § 109(h)(1), an individual may not be a debtor unless within "the 180-day period ending on the date of filing of the petition" he or she received a briefing from an "approved nonprofit budget and credit counseling agency described in section 111(a)," which may be by telephone or on the internet and includes a "related budget analysis." That briefing is a filing requirement, so a counseling session can come before either choice: you may do it, learn what a DMP would look like, and still decide to file; or you may do it and choose the DMP. The CFPB notes that an initial counseling session "typically lasts an hour." Whether a particular agency's DMP intake session also satisfies § 109(h) depends on whether that agency is approved for that purpose; confirm before you rely on it, and see credit counseling and the debtor education course. For the general picture, see credit counseling help and does credit counseling work?

Warning signs of a scam

The FTC's guidance on credit counselors and debt relief warns of these signs. Among them: avoid organizations that "push a debt management plan (DMP) as your only option before they spend a significant amount of time analyzing your financial situation"; "beware of any organization that tells you it can remove accurate negative information from your credit report"; and note that "Only scammers will try to collect fees from you before they settle any of your debts or enter you into a debt management plan." The FTC also says some organizations urge "voluntary" contributions "that can cause more debt," and not to sign up for a DMP "if you can't afford the monthly payment." See debt relief scam red flags and how to spot a legitimate debt relief company.

Common fears and misconceptions

• "A DMP stops collection like bankruptcy does." It does not carry a statutory stay; it depends on creditors accepting the plan.
• "A DMP reduces what I owe." It typically reduces interest and fees; the debt is repaid.
• "Bankruptcy wipes out everything." Discharge has exceptions in § 523 and § 1328(a).
• "Counseling means I have committed to a DMP." A counseling session is information; the FTC says to avoid organizations that push a DMP as the only option before analyzing your finances.

Mistakes to avoid before choosing

1. Starting payments before creditors accept the plan.
2. Signing a DMP whose monthly payment you cannot sustain.
3. Using an agency that is not approved if you also need the § 109(h) briefing.
4. Ignoring a lawsuit or garnishment while waiting for a plan to start.
5. Choosing by monthly payment alone. Compare total repayment, timeline and what each path does to secured debts.

What to expect at the consultation

A consultation usually starts with a list: each debt, whether it is secured, priority or unsecured, any lawsuit, garnishment, repossession or sale dates, income and household size, and any prior bankruptcy or counseling. From there an attorney can explain whether a DMP, Chapter 7, Chapter 13 or something else fits the facts. Which federal district handles your case depends on your county; see our Dauphin County and Cumberland County pages or locations for other counties.

Call (717) 724-7503 or schedule a consultation to talk through your situation.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Sean P. Quinlan, Esq., Quinlan Law Group, Camp Hill and Harrisburg, Pennsylvania.

This page is general information about Pennsylvania and federal bankruptcy law, not legal advice for your situation, and reading it does not create an attorney-client relationship. This is attorney advertising. Deadlines and outcomes depend on your facts; talk to a licensed attorney before relying on anything here.