Adapted from an article from ArticleClick.com
Chapter 13 Bankruptcy and Debt Consolidation are both forms of debt reorganization where the debtor can come to more manageable terms of repayment over a prearranged period. However there are significant differences between these two types of reorganization.
In traditional debt consolidation your debts are grouped into one loan and paid over time at a rate negotiated or set by the consolidating agency. There are some advantages to debt consolidation over bankruptcy. Most noteable is that rather than owing many creditors you'll simply owe one and although the interest rate may be lower the monthly payments may be larger or longer in duration. Additionally, Debt consolidation may have a lesser impact on your credit report and it can be a good alternative for someone with disposable income and too much consumer debt. That said, although debt consolidation can help you greatly, if you do not change your financial habits you can end up with more trouble than you started with.
Bankruptcy, on the other hand, provides a layer of protection that you simply can not get from any other reorganization program. Most noteable is the power of the federal bankruptcy code as protection from creditors while you arrange your affairs; a protection that remains until your case is sorted out in a Federal Court. Another benefit is that your secured debts have the priority, these are the loans on your home, auto and anything that has a substantial guarantee then your unsecured debts are taken care of if there is money left over. Traditional consolidation loan programs can not delay payment on either type of debt, it all has to be considered equally important.
In bankruptcy, an “Order of Relief" will prevent creditors from harassing you in their attempts to collect payments from you. This order also has the power to stop foreclosure proceedings and the recovery of any security assets or any compilation judgments against you from taking place. There are no equivalent benefits in debt consolidation that can provide this level of protection and your creditors can not be forced to stop their attempts to collect from you.
There are different levels of bankruptcy however -- personal versues business, restructuring versus write-off. Your personal circumstances along with your attorneys input will dictate the proper couse of action. Some things to consider:
- Invoking Chapter 13 bankruptcy will give you between 3 and 5 years to complete repaying your debts under a new restructured plan of repayment. This can typically lower your payments by reducing the balances and the interest rate due. Under traditional consolidation loans, debt can be carried over for years without reducing the balance significantly.
- Chapter 13 bankruptcy requires no guarantee and furthermore it protects you home from being at risk of repossession or foreclosure. Some debt consolidation programs may require you to post some kind of guarantee and typically they prefer your home if it has a good level of equity.
- Unclaimed debts are eliminated when you file Chapter 13 bankruptcy. Additionally all your creditors are required to file a proof of claim with the bankruptcy court, which they sometime opt to not file this claim for whatever reasons, thereby their claim completely. No other consolidation program can extend this type of benefit.
- In chapter 13 you can include tax arrears, mortgage arrears, child support and alimony payments, secured and unsecured debts all under the same plan providing you with the same level of protection from all creditors. Debt consolidation programs, however, will not be able to include all your debts as some programs only work with credit card debt, while a separate agency may specialize in tax debts.
Contact your attorney for more information and a personal consultation regarding your financial affairs. They will help you chart a course and navigate through the financial pitfalls associated with reorganization plans.
