Both chapter 13 bankruptcy and debt consolidation are forms of restructuring debt to come to more manageable terms of repayment for the debtor over a predetermined period. However there are significant differences between these two types of consolidation. Mainly 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, rather than owe many creditors you’ll simply owe one and although the interest rate may be lower the monthly payments may be larger.
Debt consolidation also has a lesser impact on your credit report and it can be a good alternative for someone with disposable income and too much consumer debt, but the circumstances change a lot per case, so 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.
The advantages of chapter 13 bankruptcy
Chapter 13 bankruptcy far outweighs any benefit that traditional debt consolidation can offer. The main benefit of chapter 13 bankruptcies is that it has certain legal aspects that provide a layer of protection that you simply can not get from any other debt consolidation program. The power of the federal bankruptcy code stands behind your right of bankruptcy protection and that protection remains until your case is sorted out in a federal court.
The power of the Automatic Stay
The “Automatic Stay” also known as the “Order of Relief”, provides that protection that keeps your creditors from harassing you in their attempts to collect payments from you. This order also has the power to stop foreclosure proceedings, repossession of any collateral property or any collection judgments against you from taking place. There are no comparable 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.
Repayment of your debts in 3 to 5 years
Under chapter 13 bankruptcy you get between 3 and 5 years to complete repaying your debts under a new restructured plan of repayment, which typically can lower your payments by reducing the balances and the interest rate due. Under traditional consolidation loans the debt can be carried over for years without reducing the balance significantly.
Protect your home’s equity
Some debt consolidation programs may require you to post some kind of collateral and typically they prefer your home if it has a good level of equity. Chapter 13 bankruptcy requires no collateral and furthermore it protects you home from being at risk of repossession or foreclosure.
Restructure debts on a level of priority
Another benefit of chapter 13 is that your secured debts have the priority, these are the loans on your home, auto and anything that has a tangible collateral, 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.
Most debts are included in your chapter 13 bankruptcy case
Normally under a debt consolidation program you are not able to include all your debts, some programs only work with credit card debt, while a separate agency may specialize in tax debts. 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.
Unclaimed debts are eliminated
When you file chapter 13 bankruptcy all your creditors are required to file a proof of claim with the bankruptcy court, often some creditors will not file this claim for whatever reasons, but it they do not and you finish your repayment period to satisfy your debts then any unclaimed debts are eliminated and you’re no longer obligated to repay them once your case is discharged. No other consolidation program can extend this benefit.