« SB 61: Eliminate Mortgage Liens in Chapter 13 | Home | Bank Accounts Frozen After Filing Bankruptcy »
Debt Consolidation or Bankruptcy: Which is Better?
By Mark Markus | February 4, 2009
One of the most frequent questions bankruptcy attorneys are asked by potential clients is whether they should file bankruptcy, or use a debt consolidation company to make payments towards their debts. For those lucky debtors who qualify for Chapter 7 (which requires no repayment of debts but allows in most cases for discharge of all dischargeable debts), the decision is markedly easier to make.
But what about those who have the ability to make some monthly payments to their creditors and don’t qualify for chapter 7? Their primary bankruptcy option in many cases is Chapter 13, which allows for, usually, a partial repayment of the debt. Armed with this choice, most people decide that debt consolidation, rather than filing a Chapter 13 bankruptcy case, is their optimal solution. However, this is almost never true.
In Chapter 13, the amount you have to repay to your creditors will almost always be less than (or, at worst, equal) to what you will have to repay outside of bankruptcy. This is true even if you are required to repay 100% of your debts in a Chapter 13 case. Depending on various factors–primarily your income and expense– you can get a discharge of your debts in a Chapter 13 case repaying anywhere from 0% to 100% of your unsecured debts for 36-60 months.
Why is it better to repay 100% in a Chapter 13 rather than doing debt consolidation? Because you do not have to pay for interest accrual on unsecured debts in a Chapter 13. Even under the best consolidation deal outside of bankruptcy there is going to be interest paid. Also, in Chapter 13 your repayment plan will be for a maximum of 60 months (and in many cases can be as little as 36 months). This can result in significantly less paid out over time than one would have to pay in a debt consolidation arrangement.
So if you are in a position where you may have too many assets or income to qualify for a Chapter 7 case, but are having trouble managing your monthly payments on your credit cards or other unsecured debts, you should consult with a bankruptcy attorney about the possibility of filing a Chapter 13 case. You very well may be able to pay off all your unsecured debts with affordable monthly payments in less than 5 years!
Topics: chapter 13, debt consolidation, means test | No Comments »
Comments
You must be logged in to post a comment.