If you're in debt, you have a number of options to help you deal with your finances. Debt consolidation and Chapter 13 bankruptcy represent two different approaches to getting out of debt. While either choice can potentially help you resolve your debt, each has advantages and disadvantages that you should understand before determining which choice offers the best solution.
Function
Chapter 13 bankruptcy allows debtors to reorganize their debts and repay them over time from future income. Chapter 13 can help you catch up if you've fallen behind on your financial obligations and prevent you from losing control of your assets. The purpose of a debt consolidation is to allow you to combine multiple debts into one monthly payment so you can pay down your debts faster.
Process
Chapter 13 is a legal process regulated by the U.S. Bankruptcy Courts. You must file a bankruptcy petition to initiate a Chapter 13 case. You create a repayment plan based on your income and make regular payments to the court over a period of three to five years. With debt consolidation, you typically combine payments through a loan or line of credit and make monthly payments to the lender according to its repayment schedule.
Cost
Both debt consolidation and Chapter 13 can potentially be costly. As of 2010, the filing fee for a Chapter 13 case is $274, according to the U.S. Courts website. However, if you are represented by an attorney, your case can cost thousands of dollars. With debt consolidation, you typically have to pay interest on the loan each month. If you're using a home equity loan or line of credit, you may also have to pay closing or monthly maintenance fees.
Benefits
The primary benefit of debt consolidation is that it can help you save money in interest costs and monthly payments if you consolidate to a lower rate. The main benefit of Chapter 13 is that it can help you avoid collection actions from creditors. When your bankruptcy petition is filed, an automatic stay goes into effect that prevents creditors from pursuing outstanding debts. A Chapter 13 bankruptcy can help you avoid lawsuits and foreclosure if you are able to make plan payments regularly.
Considerations
Debt consolidation is not without its pitfalls. For example, consolidating credit card debt can help you save money, but it can land you in more debt if you run up your balances again. If you have poor credit, it can be difficult to obtain financing for a consolidation loan. If you file Chapter 13 but are unable to make plan payments, creditors can be free to resume collections against you. Even if you complete your plan successfully, your bankruptcy filing can damage your credit for up to seven years following your discharge.
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