Debt Settlement and Consolidation V.S. Chapter 13 Bankruptcy

At first glance, debt settlement or debt consolidation and a Chapter 13 Bankruptcy filing seem very similar. However, upon further inspection, one finds that debt settlement, or consolidation, are significantly different from a Chapter 13 Bankruptcy. All three are a means for an individual person to take stock of his or her financial situation, and develop a plan of action to repay some or all debts. However, Chapter 13 Bankruptcy is the one of the three that has built-in safeguards that will allow for a fair repayment of all debts with full weight and force of the federal court behind it.

Debt settlement or debt consolidation means that you will engage in direct negotiation with each of your individual creditors to reduce the amount of debt you owe to each of them. The payment arrangement is completely voluntary and either party can cancel the agreement at any time. This process seems simple enough, but debt settlement outside of bankruptcy contains many pitfalls.

First, creditors can refuse to negotiate with you or refuse to be part of a prepared debt consolidation plan. There is, legally speaking, no way to force any creditor to negotiate with you or be a part of a debt consolidation plan. For example, some credit card companies and most hospitals will refuse, as a matter of policy, to take payment from a debt consolidation plan. Further, a creditor is free is chose or not to chose to negotiate a settlement with you, and pursue their other collection options, such as lawsuits and wage garnishments. In a Chapter 13 Bankruptcy, on the other hand, if a creditor refuses to be part of the Chapter 13 Bankruptcy plan they may lose their opportunity to collect from you at all. For instance, if a credit card or hospital elects to not be a part of a Chapter 13 Bankruptcy they will receive nothing through your Chapter 13 Bankruptcy plan and the debt owed to them will be eliminated upon successful completion of the 13 Bankruptcy plan. This “discharge” of debt is enforceable by a federal bankruptcy judge.

In addition, there are no rules that govern the amount of money you will pay to your creditors in a debt settlement or a debt consolidation. In debt settlement or debt consolidation, you are forced to go it alone against creditors or literally go “hat in hand” and beg your creditors for a deal. Whereas in Chapter 13 Bankruptcy, the federal bankruptcy code will determine how much is paid based on rules set out by Congress. For example, if you can justify paying only 10% back on your unsecured debt, then your creditors will get 10% of what they are owed, and not a penny more. The balance that you owe to them will be eliminated upon successful completion of the 13 Bankruptcy plan.

Further, a debt settlement or consolidation may result in income tax consequences to you on the amount of debt the creditor “forgave.” Bankruptcy has no such ramifications. Discharging debt in bankruptcy does not result in taxable income to the debtor.

In Chapter 13 Bankruptcy, a creditor who does not abide your Chapter 13 plan or does not respect the laws of Chapter 13 Bankruptcy can be swiftly punished by the bankruptcy court. For instance, a creditor who tries to collect from you outside the terms of your Chapter 13 Bankruptcy are is subjection to sanction and even monetary sanctions enforced by the bankruptcy court. Thus, there is built in enforcement of the plan through the courts that does not exist with debt settlement or consolidation.

Lastly, there are fees and costs associated with paying a “debt consolidation company” to help you negotiate settlements with your creditors. Such fees and costs often exceed the cost of legal counsel to represent you in bankruptcy! With debt settlement companies you are not getting legal advice. They are not allowed to counsel you about your budget and they can not represent you in any court proceedings.

Since Chapter 13 Bankruptcy is backed by the power of the federal courts, it is the most efficient way to reorganize, and pay back some, or all, of your outstanding debts. To find out all of the advantages of a Chapter 13 Bankruptcy contact a Legal Helpers attorney right away

Chapter 13 Bankruptcy law