Paul Horton: Chapter 13 Bankruptcy Compared to Other Debt Solutions

Chapter 13 bankruptcy is known as a reorganization bankruptcy because it allows you to file for protections under the Federal Bankruptcy Code while repaying your creditors; effectively reorganizing your debt. Because I am a bankruptcy lawyer, we file chapter 13 cases on a regular basis. A chapter 13 is very different from a Chapter 7 bankruptcy, and offers far greater benefits over third-party financial services such as debt consolidation and credit counseling.

What are the advantages of Chapter 13?

While many third party companies have sprouted up over the last several years claiming to work wonders with secured and unsecured debt, the power of the Federal Bankruptcy Code has been an established part of American society for decades. Many of the fly-by-night debt consolidation, debt settlement, and credit counseling programs make empty promises, but Chapter 13 bankruptcy is a proven and effective way to utilize federal laws to get out of debt.

The automatic stay

The instant your chapter 13 bankruptcy is filed, the automatic stay guarantees that collection efforts are stopped in their tracks. This has the effect of halting collection efforts from phone calls, lawsuits, garnishments, repossessions and even foreclosure. Debt consolidation programs on the other hand have no legal authority to stop any kind of collection activity. Furthermore, some unscrupulous debt consolidation firms have been known to take large fees and leave their clients to the mercy of the collectors when the inevitable garnishments and credit card lawsuits begin.

Asset Exemption

Unlike debt consolidation, Chapter 13 bankruptcy offers protection on secured assets for a total of over $1 million, as well as providing protection for unsecured debts of up to roughly $330,000. One can even exempt retirement accounts, ensuring a better financial future. While the process of reorganizing debt through bankruptcy can be considered a consolidation, it’s a world away from the financial service that seeks to take out an even bigger loan to cover debts. One of the widely criticized aspects of third-party debt consolidation is the practice of taking out a large home equity line of credit to cover unsecured debts. This is essentially trading debt on credit cards for a debt on one’s shelter and home. Chapter 13 bankruptcy offers a guided solution for people to pay down unsecured and secured debts without risking losing their home to foreclosure.

Reduced Payback Amount

While the exact amount depends on the Bankruptcy Court where it is filed, your debt can be reduced by as much as 90% through skillful negotiation by experienced attorneys. Debt consolidation does not reduce the principal owed, and there are additional fees included. Debt settlement may be able to reduce the amount of debt, but the amount of debt that is reduced is often subject to extensive IRS tax liabilities! Furthermore, these negotiations often require a lump-sum payment, and chances are if you’re struggling to make ends meet, you haven’t got thousands of dollars hidden in your mattress.

On Your Terms

Debt consolidation and credit counseling programs are often at the mercy of creditors. If the creditor decides to file a lawsuit, garnish wages, or attempt to repossess or foreclose on property, these services can only stand by and watch. Creditors maintain their power. Chapter 13 bankruptcy on the other hand puts the debtor and their attorney in control. Creditors are the ones who must comply with the program. In fact, they are prohibited by law from making attempts to collect their debts from the individuals involved – they get what the court gives them.

Limited Timeframe

Chapter 13 bankruptcy usually has a repayment period of 3 to 5 years that is set up in accordance with the individual’s ability to pay, income, assets, total debts and other expenses. Once this term is completed, any remaining debt liability is considered “discharged,” or wiped away for good. Debt consolidation and credit counseling can last for years without making a significant impact. Some of these organizations have even been sued by the federal government for taking their clients’ payments without getting them out of debt. Even the organizations that comply with the law do not always obtain consistent results for their clients, because they offer incremental steps for problems that often require immediate and significant action.

No Interest or Late Fees

As soon as Chapter 13 is filed, interest and late fees on most types of unsecured debt cease to accumulate from that moment on. Debt consolidation at its best can only reduce the interest rate. The same result can be accomplished by an individual simply calling their bank and attempting to negotiate a lower rate on an existing loan. In addition to that, the debt consolidation companies are receiving a portion of the funds, either directly or indirectly. Either way, it creates an incentive for the debt consolidation organizations to drag out the process. This is a contributing factor to why many debt consolidation plans fail.

Your Best Interests

When filing for Chapter 13 bankruptcy protection, your attorney has an obligation to always do what is right for you, the client. Violations of this are taken very seriously and can result in an attorney losing their license (being disbarred). This is why if you hire an attorney you can expect to see real results and not have to worry about a conflict of interest.

Pay Necessities First

Unlike a debt consolidation program, chapter 13 bankruptcy allows you to pay your most important bills first: your property and taxes. Unsecured debts get any leftovers after your vital bills have been paid. Since debt consolidation providers often only deal with unsecured debt, it can have the unwelcome effect of focusing an individual’s resources on credit card bills, while their property goes unpaid and potentially becomes foreclosed upon.

Free Consultation with a Bankruptcy Lawyer

When you are ready to file bankruptcy, call Ascent Law now at (801) 676-5506. Attorneys in our office have filed over a thousand cases. We can help you now. Come in or call in for your free consultation.