Chapter 13 Bankruptcy or Debt Consolidation: Which Is Better?
Chapter 13 Bankruptcy is a legal process that differs from traditional debt consolidation in many important ways. If you are trying to decide between these two processes, this article will help you make your decision.
While a Chapter 13 bankruptcy is actually a type of debt consolidation, it differs from traditional debt consolidation in certain important legal aspects. The most glaring and important difference is the power it wields. Backing up Chapter 13 bankruptcy is the Federal Bankruptcy Code, which can be a huge advantage when you are needing relief from debt.
Chapter 13 Protects You Immediately
An automatic stay will lock into place as soon as you file a Chapter 13 bankruptcy. It’s in the form of a Bankruptcy Court injunction which effectively stops most recovery efforts that have been launched against you. Garnishments, repossessions, foreclosures, creditor harassment and license suspensions will cease. Your creditors will be forced to stop all such actions because this injunction has the legal chops to back it up. In reality it’s a court order that mere debt consolidation services cannot provide.
Chapter 13 Covers Most Debt
In Chapter 13 bankruptcy, such specific debts as tax debt, child support arrears, car payments, and mortagage arrears can be rolled into one monthly payment. This is good news because the majority of traditional debt consolidation services allow only specific debts in the settlement plan. Wouldn’t you rather have protection from every one of your creditors?
Chapter 13 Severely Reduces The Total Debt
With the power of a Federal judge ordering your creditors to stick to the repayment plan, you may be allowed to pay as little a 10% of any unsecured debts. Of course there are certain qualifications you must meet. If you can meet these qualifications the other 90% will be eliminated. You’ll be able to pay off your debts much more quickly because of the severe reduction in principal owed. This is something that traditional debt consolidation plans cannot do. They can only ask the creditor to lower the interest rates and reduce the balances owing.
Chapter 13 Bankruptcies Don’t Drag On
You’ll only have to wait between 3 and 5 years for Chapter 13 bankruptcy to conclude, at which time all dischargeable debts are eliminated. Conversely, a more traditional consolidation could drag on indefinitely while you struggle with balances that remain high and continue to accumulate additional interest and finance charges.
Chapter 13 Takes No Late Fees or Interest
With Chapter 13 bankruptcy, the payments you make towards your unsecured debt will usually be put against the principal, thus drastically shortening the amount of time it will take you to repay that debt. In fact, debts that exist before filing bankruptcy will not accrue late fees, and in most cases will be repaid free of interest, unlike the usual debt consolidation process.
Chapter 13 Attorneys Work For You
Unlike a debt consolidator, your Chapter 13 attorney will vigorously represent only your best interests. He has a legal and ethical obligation to do so, and must comply with his obligations as regulated by state law. Many times debt consolidation companies are privately run, and may, in fact, be sponsored by the creditor themselves. With a Chapter 13 attorney on your side, you have the unique opportunity of having your rights backed up under strict legal requirements.
Chapter 13 Protects Your Property
You won’t be required to post any collateral in order to proceed with Chapter 13 bankruptcy if you cannot afford the proposed monthly payments. Many home equity loans and traditional debt consolidation companies force you to risk losing your home and your property.
Chapter 13 Takes Care of Your Important Debts First
Most of your secured loans will be paid off first at the conclusion of a Chapter 13 bankruptcy plan. This includes such things as mortgage and automobile payment defaults. Unsecured debt payments such as credit cards and medical bills are taken care of after secured and other important claims have been paid. You will probably incur penalty charges under a normal debt consolidation company in return for delaying payments to unsecured creditors. These companies also give preferential consideration to home finance companies and car payments, which leaves little for the remaining claims. The bigger the balance owing, the bigger the penalty charges.
Chapter 13 Requires the Creditor to File A Proof OF Claim
Under Chapter 13 bankruptcy all unfiled claims are eliminated if the creditor fails to file a proof of claim with the Bankruptcy Court. It happens fairly frequently that a creditor may be listed in the Chapter 13 bankruptcy file, but forget to do the proper paperwork, thus effectively eliminating themselves from the consolidation. If you complete the terms of your Chapter 13 repayment plan, such claims are ruled invalid, and you never have to pay them back.
By: Rick Hendershot
