Bill Consolidation and Chapter 13 Bankruptcy

When personal debt grows beyond an individual's ability to control it, options to get out of debt may seem limited. Two methods of handling out-of-control debt are bill consolidation and Chapter 13 bankruptcy. While these options have similar goals, namely the restructuring of debt to make it easier to repay, there are differences between them. Bill consolidation and Chapter 13 bankruptcy are not the same thing.

Bill Consolidation

Bill consolidation is the process of taking multiple debts and combining them into a single payment. This is generally done through a secured loan, with the borrowed money paying off some or all of the debts involved. This leaves only the loan payment to make, often creating a significant reduction in the amount that must be paid toward debts each month. Consolidating bills and other debts with a loan stops the debts from further damaging the borrower's credit since the debts are from that point reported as paid in full or up to date.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a bankruptcy filing in which the court assists the filer in creating a monthly payment plan to repay his outstanding debts. This allows the debtor to pay what he owes over time at a rate he can afford while stopping collection and repossession attempts. Because most debts involved in a Chapter 13 bankruptcy are repaid instead of being reduced or discharged by the court, these bankruptcies are often referred to as "restructuring" bankruptcies.

Similarities

Both Chapter 13 bankruptcy and bill consolidation allow an individual who is in debt beyond his means to repay what he owes while reducing the amount that must be paid each month. Both of these debt management solutions convert multiple debts to a single monthly payment and also stop collection attempts from creditors or collection agencies.

Differences

There are significant differences between bill consolidation loans and Chapter 13 bankruptcy filings. Consolidation loans give additional money to pay for existing debts, meaning that the debtor must pay back the full amount of the consolidation loan with interest. Chapter 13 bankruptcy on the other hand is a court-managed repayment plan that reorganizes the existing debts in such a way that they become easier to pay.

Effects on Credit

Both bill consolidation loans and Chapter 13 bankruptcy have an effect on an individual's credit rating. Because bill consolidation is performed by taking out a loan, on-time loan payments are generally reported to one or more credit bureaus by the issuing bank or finance company; this can result in an increase in the borrower's credit score over time. Chapter 13 bankruptcy has a much more negative impact on an individual's credit history, with many lenders and creditors being unwilling to extend credit or issue loans to those with a bankruptcy filing on their credit until several years after the filing is discharged.