It’s hard to know which direction to go when faced with debt problems.

Debt consolidation is one option many utilize to get a handle on their debts.

But the typical debt consolidation programs don’t save you any money.

In fact you’re really just paying someone else to make your payments for you, and you’re still paying interest and other charges on your debts.

Or you are just taking out one new loan to pay off all of your numerous older loans.  (See more on Non-Bankruptcy Debt Resolution Options)

Chapter 13 Repayment Terms Are Usually More Favorable And Are Guaranteed

Chapter 13 often allows less than 100% repayment of debts at zero percent interest and is usually a better deal than debt consolidation.

For those lucky debtors who qualify for Chapter 7 relief (which requires no repayment of debts and 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 usually allows for just a partial repayment of the debt.

Yet for some reason, armed with this choice, most people decide that debt consolidation, rather than filing a Chapter 13 bankruptcy case, is their optimal solution.

Chapter 13 Forces Creditors to Accept Less

In Chapter 13 repayment plan, 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 (see why below).

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, depending on your budget and asset values.

And here’s the real kicker:  Your creditors must accept the terms of the repayment plan as long as the court finds the plan is proposed in good faith and meets all the requirements of the bankruptcy code.

Chapter 13 Plans Are Zero Percent Interest!

Why is it better to repay 100% in a Chapter 13 rather than doing debt consolidation?  Because you do not have to pay any interest on unsecured debts in a Chapter 13!

Even under the best consolidation deal outside of bankruptcy there is going to be interest paid.

Shorter Repayment Periods Possible

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.

Dismiss Your Chapter 13 Case Any Time

There are exceptions to everything in the law, but in most situations you can decide to back out of your Chapter 13 case at any time and have it dismissed.  So you’re not obligated to continue with the repayment plan if you later decide it is in your best interests to stop.

What About Debt Settlement?

Debt settlement works fine, but it really requires settling with ALL creditors, not just a few, and you still need to make the required settlement payment which will have terms and conditions attached.

If you have the ability to settle with creditors and pay a lump sum to take care of it, that can be an acceptable result, but even in that situation, an analysis should be done to compare what the payments would be in a Chapter 13 and see which solution really is superior.

Always Explore Chapter 13 as an Option

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 very affordable monthly payments in less than 5 years!

Image courtesy of Fabrizio Sciami