Chapter 13 bankruptcies are a type of “debt consolidation” that allows you to reorganize your finances by consolidating your debts into one monthly payment.
Chapter 13, however, should not be confused with other types of debt consolidation programs such as consolidation loans from a bank or finance company OR credit counseling payment plans.
The Power of the Federal Bankruptcy Code
Chapter 13 has the power of the Federal Bankruptcy Code behind it, and provides many advantages for people seeking debt relief.
The Automatic Stay: When you file a Chapter 13 bankruptcy, you receive immediate protection by what is called “the automatic stay.” The automatic stay is a Court Order issued immediately when you file bankruptcy. It prohibits any further collection activity against you. The stay has the power to stop foreclosures, repossessions, garnishments, license suspensions, lawsuits, and creditor harassment.
Other types of debt consolidations don’t have any stay provisions. There is no Court Order protecting you and your other creditors can continue with collection against you.
Includes Most Types of Debt:Other types of debt consolidations only allow specific and very limited debts to be consolidated in the payment plan, and don’t usually consolidate important debts, like your mortgage arrears, car payments, tax debt, and child support arrears. All of these debts can be included in a Chapter 13 bankruptcy, consolidating your debt into one affordable, monthly payment.
Drastically Reduced Total Amount of Debt: Subject to certain qualifications, a Chapter 13 bankruptcy will allow you to pay as little as 10% of the unsecured debt back and eliminate the other 90%. (Please note: This percentage can vary from Bankruptcy Court to Bankruptcy Court.) Your reduction in principal owed allows you to pay your debts off more quickly than you could through other consolidation plans. With other types of consolidation plans, you have to repay 100% of the principal owed.
The Force of Law: The other types of loan consolidations lack the power to dictate what the creditors are entitled to be paid. These programs, especially credit counseling repayment plans, merely “ask” the creditor to lower the interest rates. Forget about lowering the principal balance owed.
For instance, credit counseling repayment plans are “voluntary” for your creditors and any creditor can decide, at any time, to stop participating, regardless your position. Bankruptcy law on the other hand is Federal law. Creditors are told what to do and how and when to do it. Creditors that fail to comply with Bankruptcy law can be hauled in front of the Bankruptcy Court and punished.
Definite Time Frame: Chapter 13 bankruptcies are usually between 3 and 5 years in length with all dischargeable debts eliminated at the completion of the bankruptcy. Other types of loan consolidation programs present the possibility that the plans could drag on for years without significantly lowering the balances.
No Interest or Late Fees: Upon filing Chapter 13, any debt in existence prior to the filing does not accrue any more late fees, and in most cases what little has to be re-paid can be repaid “interest-free”. All of the money you pay toward your unsecured debt will generally be applied toward principal drastically reducing the amount of time it takes you to get out of debt.
The other types of consolidation plans don’t reduce the amount of the debt at all, and at best only lower your interest rates somewhat, and then only with respect to the unsecured creditors that participate. The result is that many good, hard-working people just like you end up strapped with monthly plan payments far in excess of what they can afford. What good is a plan payment you can’t afford?
Attorney Working in Your Best Interests: Your Chapter 13 attorney has a legal and ethical obligation to zealously represent your best interests. State law regulates your attorneys’ compliance with his obligations to you. Thus, in a Chapter 13 bankruptcy, you have the opportunity to have a bankruptcy attorney represent only your interests and you are ensured that your attorney is fighting for your rights.
Many debt consolidation programs are private entities. Some are scam operations sponsored by and controlled by the creditors, and as such, there are no mechanisms in place to protect you or to look out for your best interests.
Protects Equity:A Chapter 13 bankruptcy does not require you to pledge any collateral in order to consolidate. Many of the other consolidation plans, including home equity loans, require you to risk your home and property, if you can’t afford the monthly payments.
Pays Your Most Important Bills First: A Chapter 13 bankruptcy plan pays off most secured loans first, taxes, and co-signed debts second, and delays payment of unsecured debts to last. The majority of the initial Chapter 13 payments can be applied towards mortgage and automobile payment defaults. Then, your money goes to pay overdue taxes and co-signed debts. Credit cards and medical bills can be paid after these secured and other priority claims have been paid off.
Credit counseling repayment plans, for instance, don’t have the power to delay payments to unsecured creditors without penalty or to give preferential treatment to your car or home finance companies.
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 of unsecured creditors are eliminated and this means by paying zero cents on the dollar.
In the case of credit counseling repayment plans, a creditor who does not participate is still owed 100% of its debt and 100% of its interest, fees, etc.
Does NOT Put Other Types Of Property In Jeopardy: Many times, the only way to qualify for many of the other types of loan consolidations is to pledge other property you own as collateral as, for instance, when you pledge your house to get a second or third mortgage to come up with the money to pay off some credit cards or other unsecured debts. Using this example, this puts your house at risk because if you can’t make your payments now not only can the creditors come after you the creditor can take your house. The same thing can happen when you give a creditor a second or third lien on your car or truck.
In Chapter 13, you can put creditors under legal control without having to offer up any more of your property as collateral.
For more information on how you might benefit from Chapter 13, call our office for a free consultation.