5 Reasons Why Filing Chapter 13 Is Better Than Debt Consolidation
For some individuals, a debt consolidation may be an effective means of resolving a debt problem. However, in many cases, a debt consolidation can make matters worse, especially if you do not choose a reputable debt consolidation company.
In addition to high fees, the debt consolidation company cannot give you certain guarantees because it does not have the authority of a federal court backing up its actions. With a Chapter 13 bankruptcy case, you have the protections of the United States Bankruptcy Code on your side. This authority offers a few benefits that debt consolidation simply cannot provide.
- Creditors Must Participate
In a debt consolidation, your creditors are not legally required to negotiate the amount you owe or the interest rate charged. You could easily find yourself in a situation where you pay a large monthly payment to the debt consolidation company in addition to one or two monthly payments to creditors who refused to participate in the debt consolidation.
However, creditors must participate in your bankruptcy case unless they receive permission from a bankruptcy judge. Creditors cannot “opt out” of bankruptcy for just any reason — they must have a valid legal reason for requesting permission to continue collection efforts (i.e. you refuse to pay your mortgage payment).
- Tax consequences for “charge-offs.”
If your creditors do allow you to pay less to satisfy your debts, the remaining portion of the debt is charged off. A creditor is required to report the charge-off to the Internal Revenue Service. When you file your taxes, the amount of the charge-off is treated as income which could increase the taxes you owe.
In bankruptcy, the amount discharged is not considered income by the IRS for tax purposes. For example, if you file a Chapter 13 case and pay 10 percent to your unsecured creditors, the remaining 90 percent of the discharged debt does not count as income.
- Stop Creditor Harassment
A debt consolidation does not stop the calls and letters from creditors. However, filing a Chapter 13 bankruptcy case stops creditor harassment immediately. Creditors are barred from contacting debtors to attempt to collect a debt during the bankruptcy case. Creditors can send correspondence for informational purposes only, but they cannot demand payment of the debt as they can in a debt consolidation.
- Stop Collection Lawsuits
As with creditor harassment, a debt consolidation does not prevent a creditor from filing a collection lawsuit. You could pay each payment for two years, and then the creditor could file a lawsuit for the remaining balance. This practice happens a good bit when a creditor sells your account to another creditor.
In a Chapter 13 case, the creditors cannot file a collection lawsuit or pursue other types of collection actions such as wage garnishments, foreclosures, or repossession, even if the account is sold to another creditor. The same rules also bind subsequent creditors in a bankruptcy case.
- Stop Foreclosures and Repossessions
If you are behind on your car payments or mortgage payments, a debt consolidation cannot help you. Your mortgage company or car lender will not agree to spread out the past due amount over several years. In a Chapter 13, you can keep your home and your car because you can pay the past due amounts over several years through your bankruptcy plan. For many Chapter 13 debtors, keeping their home and car is one of the main reasons they choose to file a Chapter 13 case.
Do You Have Additional Questions About Filing a Chapter 13 Bankruptcy Case?
If you are thinking about filing a bankruptcy case to get out of debt, we can help. Our New York bankruptcy attorney has experience handling a variety of cases, including complex Chapter 13 matters. Before you hire a debt consolidation company, talk to a Manhattan bankruptcy lawyer for free. Get the facts about debt consolidation vs. bankruptcy from an attorney who has your best interest at heart.
Call (212) 244-2882 or use our online contact form. Our office is located in Midtown Manhattan in New York City.