Debt Consolidation vs. Bankruptcy

Debt Consolidation
Dave Ramsey is right when he says that debt consolidation is “nothing for than a con” that addresses the symptoms and not the disease.  However, he misses that mark when he says that bankruptcy is an evil to be avoided.

When Congress amended the Bankruptcy Code in 2005, it added a provision requiring debtors to take a class in credit counseling before filing for bankruptcy.  After a debtor files for bankruptcy, they must also take a class in personal financial management before receiving a discharge.  Congress wanted more people to file for Chapter 13 repayment plans or use other options like debt consolidation.  What many people do not realize is that  a Chapter 13 bankruptcy offers several advantages over traditional debt consolidation:

The Power of the Automatic Stay

The automatic stay immediately stops nearly all collection activity, including lawsuits against you.  Traditional debt consolidation programs do not provide the same protection.  Many debt negotiation programs fail when creditors get impatient and file lawsuits to collect money owed to them.

More Powerful Than Debt Consolidation

Unlike most debt consolidation programs, a Chapter 13 bankruptcy is not limited to credit card debt.  In most cases, debts like mortgage delinquencies, car payments and tax debt can be included in a Chapter 13 repayment plan by consolidating them into one monthly payment.

Higher Debt Reduction

Chapter 13 allows you to pay as little as 10% of your unsecured debt back and eliminate the other 90%.  You can pay your debts back faster because the plan is based on your ability to pay.  Most debt consolidation plans only ask the creditor to lower the interest rates or balances.  A confirmed Chapter 13 plan is a federal bankruptcy court order that creditor must adhere to.  A debt consolidation plans is easy for a creditor to break.

Shorter Repayment Period

Chapter 13 bankruptcies generally last 3 and 5 years in length.  Other debt consolidation programs could drag on for years without significantly lowering the balances.

Eliminating Interest and Late Fees

Chapter 13 will eliminate late fees and interest on most debts.  In debt consolidation, it is up to the creditors to decide what they are willing to give up and the debtor mus try to the negotiate a favorable result one creditor at a time.

Attorney Assistance

Many debt consolidation programs are private entities, sponsored by creditors and do not answer to a licensing organization. These companies have even been know to go out of business after collecting their fees before providing any services.

Attorneys have a legal and ethical obligation to zealously represent you and would not have a bias in favor of the credit card industry.  An attorney will fight for your rights, not the interests of the creditors.

Protecting Property

A Chapter 13 plan allows you to keep your property and not give liens to creditors.  Some debt consolidation programs may involve home equity loans that require you to risk your home and property if you cannot afford the monthly payments.

Debts are Eliminated if the Creditor Doesn’t File A Proof Of Claim

Each creditor must file a proof of claim with the Bankruptcy Court if they are to be paid during the consolidation. Frequently, not all creditors listed in a Chapter 13 bankruptcy file a proof of claim.  As long as you finish the terms of your Chapter 13 debt repayment plan, all unfiled claims are eliminated and never have to be paid back.

If you are in Southern California and considering debt consolidation, please call me today at (619) 448-2129 for a free consultation to discuss your bankruptcy options.

Photo credit:  jayson.shenk

Carl Starrett

Carl Starrett is a consumer bankruptcy attorney in San Diego, California helping debtors file for protection under Chapter 13 and Chapter 7 of the Bankruptcy Code.

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  • Thanks a lot for sharing this blog. Some people think that it is impossible to get out of debt. However, this is not true. One can get out of debt through a debt consolidation program. Debt consolidation program helps you to merge your multiple bills into a single monthly payment and pay-off your debts comfortably. This program will help you to reduce the interest rate on the credit cards and eliminate the late fees or penalties.

    On the contrary, bankruptcy will ruin your credit score as well as your future. It will remain on your credit report for 10 years from the date of filing. Bankruptcy is considered as the last option of debt relief program. So I think debt consolidation is better than bankruptcy.

  • Debt settlement is rarely a better option that bankruptcy. It generally takes longer, is more expensive and usually worst for your credit that bankruptcy.

  • All the
    things you have discussed here are really so important and should be noted.
    People should not pay off debts to friends and family members; they should
    know that this will not keep them out of the bankruptcy process.

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