Chapter 13 vs. Debt Consolidation

Dayton Chapter 13 Bankruptcy Lawyer

In general, a Chapter 13 debt reorganization is better than a debt consolidation program. The legislature provides many protections and advantages under Chapter 13 of the bankruptcy code that are not available in debt consolidation programs. Here are a few.

Interest - In general, Chapter 13 debt reorganizations due not require payment of interest to unsecured creditors such as credit cards, medical bills, and similar debts. Debt consolidation programs do require payment of interest, although usually at a reduced amount.

Creditor Harassment and Collections - In a Chapter 13, all creditor harassment, collection efforts, and garnishments must stop. Creditors are forbidden from attempting or continuing all of these actions. In a debt consolidation program, all of these are voluntary and the creditor is still legally allowed to start or continue collection efforts, phone calls, and garnishments.

Foreclosures and Repossessions - In a Chapter 13, foreclosures and repossessions are stopped. The creditors do not have a choice. You are usually able to save your house and vehicle as long as you are able to pay for each. Usually, the interest on the vehicle payment is significantly reduced. In a debt consolidation program, the creditor is allowed to continue with the foreclosure or repossession. The creditor gets to choose.

Amount Paid Back - In a Chapter 13, the unsecured creditors usually receive only a small fraction of the amount owed, often just "pennies on the dollar." Each Chapter 13 plan varies, but most of the time the debt is significantly reduced. Also, many creditors do not file a proof of claim and are entitled to nothing. That saves you a great amount of money over a debt consolidation program. In a debt consolidation plan, the creditors may receive a reduced amount but the debts often continue to incur interest and late fees, and many times have adverse tax consequences so the savings are less than what they may appear.

Tax Consequences - In a Chapter 13 plan, there are no tax consequences for the unsecured debt that is not required to be paid back. In a debt consolidation program, the person is required to pay taxes on the portion of the debt that is forgiven or written off. The tax advantage (savings) by going through a Chapter 13 instead of a debt consolidation is often significant.

Fees - In a Chapter 13, the majority of the fees is allowed to be paid as part of the monthly plan payment. In a debt consolidation program, many require the payment of the fees up front or take their fees from the payments made until they are paid in full; thus, the debts go unpaid and the interest and late fees accumulate.

Overall, a Chapter 13 debt reorganization is better than an attempt at a debt consolidation or other similar service. Many people who attempt a debt consolidation program fail within a year and are in worse financial shape than when they started. If you have questions about filing a Chapter 13 debt reorganization, please contact us today.

 Chapter 13Debt Consolidation Program
*InterestUsually none to unsecured creditorsUsually still pay interest to Unsecured creditors but at a reduced rate

*Phone Calls
Garnishments

MUST stop immediatelyAre allowed to continue and only stop if the creditor voluntarily stops
*Foreclosures/ RepossessionsMUST stop immediately.
You can save your house and vehicle,
You are in control.
Creditors choose whether or not to continue with the foreclosure and repossession. You have no control over it.
*Amount Paid BackTypically pennies on the dollarLess than originally owed but with interest, late fees, and taxes.
*Tax ConsequencesNONETaxes owed on the portion of the debt that is forgiven or written off. Taxed at your income tax rate.
*FeesSome up front with most paid during the Chapter 13 planMany charge large up front fees and additional monthly fees. Many don't pay on your debt until their fees are paid causing late fees, interest, phone calls, etc.