Many people say they would pay their debts if they could, but when given the chance to do that through a Chapter 13 bankruptcy plan they sometimes balk. But if you don’t qualify for a Chapter 7 bankruptcy you can still achieve the same discharge of debt after a payment of at least some of the debt over time. Unfortunately, those who choose to not file Chapter 13 bankruptcy sometimes turn to the debt consolidation programs seen on late-night television. You only need to look at the enforcement actions taken by the Consumer Financial Protection Bureau to see what problems that can create. Choosing between Chapter 13 bankruptcy and a debt management program depends on individual circumstances, but here are some reasons why Chapter 13 bankruptcy might be a better alternative:
- Asset Protection
- Chapter 13: Allows you to keep your assets (like your home and car) while restructuring your debt. This is because you’re paying off debt over time according to a court-approved repayment plan.
- Debt Management Program: Typically, assets aren’t at risk, but these programs don’t offer the same legal protections as Chapter 13. If you fall behind on payments, creditors can still pursue collection actions.
- Debt Repayment Flexibility
- Chapter 13: Offers a structured repayment plan (usually 3 to 5 years) that can make your debt more manageable. You might pay only a portion of your unsecured debts, with the remaining balance discharged after the plan ends.
- Debt Management Program: Involves negotiating with creditors to reduce interest rates or waive fees. You pay the full amount of debt, typically over a 3- to 5-year period, but the program relies on creditor cooperation.
- Dealing with Secured Debts
- Chapter 13: Allows you to catch up on past-due mortgage or car payments over the repayment plan period, potentially avoiding foreclosure or repossession.
- Debt Management Program: Typically focuses on unsecured debts like credit cards, not mortgages or car loans. It may not provide relief for secured debts.
- Impact on Credit Score
- Chapter 13: Stays on your credit report for 7 years, which is shorter than the 10 years for Chapter 7. Since you’re repaying some debt, it might be viewed more favorably by lenders in the future.
- Debt Management Program: Does not have the same long-term impact on your credit report as bankruptcy, but missed payments before entering the program and while in it can still damage your credit score.
- Eligibility and Limitations
- Chapter 13: Available if your income is too high to qualify for Chapter 7 or if you want to protect assets. However, there are limits on the amount of secured and unsecured debt you can have.
- Debt Management Program: No legal eligibility requirements, but success depends on creditor participation and your ability to stick to the repayment plan.
- Legal Protection
- Chapter 13: Offers an automatic stay, which immediately stops most collection activities, including lawsuits, wage garnishments, and collection calls.
- Debt Management Program: Does not offer legal protections against creditors, so you could still face lawsuits or wage garnishments if a creditor refuses to cooperate.
In summary, Chapter 13 bankruptcy can be a better alternative if you need to protect assets, deal with secured debts, or if you don’t qualify for Chapter 7. It provides a structured way to manage debt while offering legal protections that a debt management program cannot.
