Chapter 13 or Debt Consolidation?

Debt Consolidation

Chapter 13 or Debt Consolidation?

There is a lot to unpack when deciding between debt consolidation and filing Chapter 13 bankruptcy. For those struggling with debt,a basic comparison can help them make the right choice for their financial circumstances.

Debt Consolidation

As the name suggests, debt is consolidated in a way that is designed to help save money and safeguard your credit rating. Finances are reorganized to provide the debtor with a single payment that should be more manageable, in theory.

Debtors who opt for debt consolidation typically wish to maintain their credit rating and access to credit. The idea is debt consolidation does not typically result in a lower credit rating, unlike bankruptcy. In many debt consolidation programs, the debtor also retains credit cards, unless this is explicitly prohibited as part of the consolidation plan. The new consolidated debt should be easier to manage, as there is a single payment without having to worry about multiple creditors and interest rates. There is also the possibility of receiving a lower interest rate with a debt consolidation loan.

There are also a number of potential downsides of going the debt consolidation route. Debtors need to enter into any agreement fully aware of the implications involved. There are often hidden fees and tax liability considerations. If you secure the loan using property as collateral, such as your home or vehicle, it is important to keep up with payments. Further, creditors may refuse to be part of a debt consolidation program, and being in such a program does not prevent a creditor from taking other collection actions against you.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy will provide you with an automatic stay, which means creditors must stop engaging in collection activities, with limited exceptions. Chapter 13 bankruptcy means paying a portion of unsecured debts through a repayment plan, which is supervised by the court. Depending on your individual circumstances, you may pay anywhere from 0% to 100% of unsecured debts in your plan, and even if a portion is paid, unsecured debts typically do not get interest. You also have the potential to save your home from foreclosure and prevent the loss of vehicles to repossession.

A Chapter 13 plan is individual to each person and is prepared taking into account your assets, debts and income. It is recommended that you hire an attorney to help with preparing a Chapter 13 plan and other bankruptcy documents, as they can be complex.

There is a negative impact of filing Chapter 13 bankruptcy on your credit score. It is important to note, however, that mismanagement of debt or inability to pay on time may have already damaged your credit score in much the same way. There is the expectation of a certain amount of sacrifice when filing for bankruptcy, in most cases. Chapter 13 bankruptcy involves maintaining a budget for 3 to 5 years, as well as requiring court permission to acquire credit.

Due to the availability of bankruptcy records from the federal bankruptcy courthouse, there is also the potential for those records to become accessible through the federal court system’s subscription-only PACER service. However, it is unlikely family or friends will learn of a Chapter 13 bankruptcy in this way.

Chapter 13 Bankruptcy Advice

Chapter 13 bankruptcy may be the right choice for you but it is important to discuss your specific financial circumstances with a bankruptcy lawyer in Georgia. At the offices of H. Lehman Franklin we provide impartial debt management advice to our clients. Call today for further information or to arrange a consultation so you can explore all your options in detail.