Chapter 13 bankruptcy and debt consolidation both offer the benefit of restructuring your debt. The goal of each program is to make your monthly payments more affordable over a specific period of time. There are advantages to both programs. In debt consolidation your debts are consolidated into one loan (if all of your creditors approve of the plan) and paid by the consolidating agency at a negotiated rate. Debt consolidation has some advantages in that it allows you to make one payment to the consolidation agency who then pays the participating creditors on your behalf. Although you interest rate may be lower your payments may be too high to manage depending on the amount of debt you owe. You can normally expect to pay approximately $300.00 a month for every $10,000 in debt that you owe.
Both Debt consolidation and Chapter 13 Bankruptcy will have a negative impact on your credit, however, the practical effect of a lower credit score is insignificant in many situations. For example, if you will be unable to pay your creditors for the foreseeable future and have been missing payments, you may not qualify for new credit, and therefore filing for bankruptcy will have little practical implication on your borrowing power. Furthermore, filing bankruptcy may be the only way to eventually rebuild your credit. Consolidation usually has a lesser impact on your credit report than a bankruptcy and it can be a good alternative for someone with disposable income, however, the circumstances vary widely per case. Additionally, if you do not change your financial habits you can end up in more debt during a consolidation than you started with.
The benefits of a Chapter 13 bankruptcy far outweigh the benefits of most debt consolidation plans.
A Chapter 13 provides the following advantages:
The automatic stay is an order for relief that protects you from your creditors attempts to collect on your debt. The order stops foreclosures (unless an order for relief is granted), repossessions and prevents collection judgments from going into effect while the stay is in effect.
Pursuant to an approved Chapter 13 you can repay all or a portion of your dischargeable debts in 3 to 5 years by making one payment to the bankruptcy trustee who will disburse the payments out to your creditors usually. In most cases your payment under Chapter 13 will be significantly less than what you would pay if you continued to pay each of your creditors separately. With a debt consolidation, you may pay on your loans for years without ever reducing the balance of your debts significantly.
Chapter 13 bankruptcy requires no collateral and it protects your home from being at risk of repossession or foreclosure so long as you continue to make your monthly payments.
A key benefit of Chapter 13 is that it allows you to pay debts based on priority, therefore, debts such as your home mortgage (if it is included in the plan) and car loan are paid first and any money left over will be used to pay unsecured creditors. Most consolidation programs do not pay debts based on priority and this may affect your ability to retain assets (such as your car) which are essential to your household. Additionally, consolidation will normally only focus on one type of debt, whereas, a chapter 13 will address all of your debt in one payment including: past taxes, secured and unsecured debt.
See frequently asked questions about chapter 13 bankruptcy in our Chapter 13 Bankruptcy FAQ section.
In light of the aforementioned benefits to a chapter 13 bankruptcy, we strongly advise that you contact one of our experienced bankruptcy attorneys today in order to determine your debt relief options.