Debt management plan or bankruptcy: how to choose
Updated November 9, 2026
A debt management plan and bankruptcy both start in the same place: a session with a nonprofit credit counselor. Federal law requires anyone filing for bankruptcy to take a credit counseling course from an approved agency within 180 days before filing, so the same session can tell you whether a plan would work instead.
Side by side
| Debt management plan | Chapter 7 | Chapter 13 | |
|---|---|---|---|
| Your debts | Repaid in full, usually at lower rates | Most unsecured debts wiped out | Partly repaid, the rest wiped out |
| How long | 3 to 5 years | About 3 to 4 months | 3 to 5 years |
| Who qualifies | Anyone who can afford the payment | People who pass an income test | People with regular income |
| What it costs | A small monthly fee | Court fee plus attorney | Court fee plus attorney |
| Lawsuits | Still possible | Stopped when you file | Stopped when you file |
| Credit reports | Closed cards can lower your score | Up to 10 years | Usually 7 years |
| Your property | You keep it | Exemptions decide | You keep it |
A few details behind the table:
- Debt management plan. The agency gets your card companies to lower rates and drop fees, and you make one monthly payment that the agency passes on to them. Creditors don't have to join, and one that isn't in the plan can still sue. The plan itself doesn't count against you in common credit scores, but the cards in it are usually closed.
- Chapter 7. You qualify if your income is below your state's median for your household size, or if a longer means test shows you can't afford to repay. A trustee can sell property that exemptions don't protect, though most people filing Chapter 7 lose nothing.
- Chapter 13. You keep your property and pay into a plan for 3 to 5 years. The plan has to pay your unsecured creditors at least what they would have gotten in Chapter 7, and your debts have to be under the federal Chapter 13 limits.
When a debt management plan makes sense
A plan usually fits when:
- Your debts are mostly credit cards, and you could pay them off in about five years at a lower rate.
- Your income is steady enough to make one fixed payment every month.
- You own a home or other property your state wouldn't fully protect in bankruptcy.
Choose an agency accredited by the NFCC or FCAA, and ask what it charges before you sign up. Many states license these agencies and cap their fees. Missing payments can cost you the lower rates, so set the payment at an amount you can keep up.
When bankruptcy makes sense
Bankruptcy is usually worth a closer look when:
- You couldn't pay off your debts within five years, even at lower rates.
- A creditor has sued you or is garnishing your pay or bank account. Filing stops most collection, lawsuits and garnishment right away.
- Your state's exemptions protect most or all of what you own.
- You're behind on a mortgage or car loan and want to keep it. Chapter 13 lets you catch up on the missed payments over the plan.
Some debts survive bankruptcy, including most student loans, recent income taxes, child support and alimony. You also have to take a money management course after you file before your debts are wiped out.
Your state's exemptions matter
Exemptions are the laws that decide what you keep in bankruptcy, and what creditors can take after they win a court judgment against you.
- Some states, including Massachusetts, Michigan, Minnesota, New Jersey and Pennsylvania, let you choose between the state's exemption list and the federal one.
- Most others, including Florida, Georgia and Ohio, make you use the state's list.
- Protection for the home you live in ranges from nothing on the state lists in New Jersey and Pennsylvania, which is why homeowners there often choose the federal list, to no dollar limit in Florida, Iowa, Kansas, Oklahoma and Texas. Federal law can cap it for a home bought within about 40 months before filing.
Your state page says which list applies where you live and what your state protects.
Before you choose
- The first session with a nonprofit credit counselor is usually free. A good counselor goes over your whole budget, not only a plan.
- Many bankruptcy attorneys offer a free first consultation, and some legal aid offices handle bankruptcies for people with low incomes.
- If neither one fits, our guides to debt consolidation and debt settlement cover the other ways out.