Tag Archives: Federal Bankruptcy Code

Can Bankruptcy Chapter 13 Score Over A Debt Consolidation Program

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Basically, a debt consolidation program allows a debtor to combine the total outstanding balances through a single payment method. Instead of making numerous and multiple payments on the credit card debts, one is able to make a single and low interest payment. This system may also help the debtor to organize the debts and to increase the credit score more conveniently. While there are numerous consumers who consider the debt consolidation method as a one stop solution to their debt problems; there are others who feel that, a debt consolidation program does not get to the essence of debts. However, there can be several occasions when a debtor might not qualify for a debt consolidation program; those who do not can think of the bankruptcy option particularly Chapter 13. Even by filing Chapter 13, one is able to consolidate huge debts, but the procedure may differ from the one that is used in a debt consolidation program. Let us study the differences and the benefits of both the processes:

Basically, Chapter 13 is a type of debt consolidation; since it is backed by a Federal Bankruptcy Code, a debtor can expect to get better advantages in this procedure.
As soon as Chapter 13 is filed, an automatic stay comes into effect. It is almost like a court based instruction which will prevent most of the debt collection efforts against the debtor. On the other hand, a debt consolidation method is not as powerful. Chapter 13 will stop such actions as a wage garnishment or a foreclosure which is forced on the debtor by the creditors.
While Chapter 13 allows each one of the debts to be combined into a monthly payment e.g. taxes, child support, car payments and mortgage. However, a debt consolidation program will allow the debtor to consolidate specific debts.
In a debt consolidation program, the creditors can only consider lowering the interest and reducing the balances; but in Chapter 13, if certain qualifications are met, a debtor can eliminate up to 90% of the debts. As a result of the reduction in the principal amount, the debts can be eliminated more quickly in chapter 13.
As far as Chapter 13 is concerned, a debtor will be obligated by court to represent the case in the best interest of the debtor; unlike debt consolidation, which is a privately run method, Chapter 13 is backed by legal requirements.
Chapter 13 is also convenient as it tackles the significant debts at first; but a debt consolidation company can penalize the debtors for delaying the unsecured debts.

Therefore Chapter 13 can be considered to be a better option than a debt consolidation program; however, there is a marked difference between the two, and the debtors should understand both the options before getting on with their debt issues.

The Myths and Reality of Avoiding Bankruptcy

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The reasons to avoid bankruptcy.

The
number of people filing for bankruptcy in 2006 was 617,660 – in 2007
that number increased to 850,912. Bankruptcy is turning into the most
convenient option for people who are facing severe financial problems.
However, strikingly, the majority of these people are ignorant of two
very significant factors. One, bankruptcy is not the best solution for
all people who are burdened by debt. Two, bankruptcy has long term
consequences that can have a negative effect on your life forever.

What is bankruptcy and why you should avoid it

The
definition of bankruptcy is a federal court process that exists to help
businesses and consumers repay their debt or eliminate their debt under
the protection of bankruptcy court. The term bankruptcy comes from the
Italian work ‘banca rotta’ which means broken bench. District courts
take care of bankruptcy filings and procedures under the Federal
Bankruptcy Act.

Types of Bankruptcy

There
are eight chapters of the Federal Bankruptcy Code. These consist of
Chapter 1, Chapter 3, Chapter 5, Chapter 7, Chapter 9, Chapter 11,
Chapter 12 and Chapter 13. Chapters 7 and 13 are the most popular
bankruptcies filed by debtors.

Bankruptcy Drawbacks

The following are a few drawbacks to filing for bankruptcy:

  • Credit History: Bankruptcy is one of the worst things that can
    happen to your credit history. It stays on your report for up to 10
    years and stays in court records for 20 years. The damage it creates
    goes further than just your credit report; it severely limits your
    ability to receive a loan and employment as banks and employers
    typically judge you by your credit report.

  • Repossession: Discharging a bankruptcy can cause you to lose valuable assets and money.

  • Social status: Personal bankruptcy can ruin your social status.

  • Business reputation: Businesses that file for the protection of
    bankruptcy stand to lose more than their reputation, they also lose all
    chances to grow their business. Their credit rating will deter banks
    from qualifying them for future business loans.

  • Financial: The most serious consequence to bankruptcy is the closing
    of all your bank accounts, credit cards, and more. Anything you are
    currently buying through financing or leasing, like your car, will be
    returned to the owner.

  • Life conditions: People who declare themselves bankrupt will find it
    difficult to buy a home, rent an apartment, get insurance, or buy a
    car. These conditions are extremely difficult in today’s world.

Because of these reasons and more, it is worth it to avoid bankruptcy for a more secure future.

Why do people file for bankruptcy?

  • Unemployment: The sudden loss of a job definitely has an impact on
    the decision to declare bankruptcy. In order to keep a certain standard
    of living, people who are unemployed are more apt to accept more debt
    without the ability to pay it back.

  • Divorce: When a couple separates or divorces, one or both parties
    typically tends to suffer financially. This seems to also be directly
    related to the rise in bankruptcy.

  • Credit Cards: There is a direct correlation between the number of
    accounts used by an adult and the rise in the rate of filing for
    bankruptcy. The more cards that a person has, the more debt will be
    accrued.

  • Debt-income ratio: This ratio is the percentage of a consumer’s
    monthly gross income that goes towards paying debts. As this rate rises
    with the general public, the filing rate for bankruptcy has also risen.

Common Myths About Bankruptcy

Bankruptcy
seems like an easy way out of debt, but the reality is a lot worse than
most people realize. Following is a list of common bankruptcy myths:

  • You will eliminate all debt: Bankruptcy will not get rid of all your
    debts. There are some that cannot be discharged in bankruptcy like
    taxes, child support, alimony, student loans, etc.

  • You will have a new beginning: Bankruptcy does not put you back at
    square one – it actually puts you at a negative beginning. As bankruptcy
    will be reflected on your credit report for 10 years, creditors will
    not be able to offer you credit terms – and if they do, they will cost a
    lot in interest.

  • You can still keep some accounts out of bankruptcy: There are very
    strict bankruptcy laws that include stiff punishment if you try to hide
    or not include any accounts. The only ones you don’t have to include
    with filing for bankruptcy are ones that you will have paid off before
    you file.

  • It’s easy to file for bankruptcy: Filing is extremely time
    consuming, as well as expensive. Recent law changes also make it much
    more difficult to file as well.

  • Debts are removed for free: Bankruptcy makes you debt free only by
    liquidating your assets – which could mean losing your home, car, etc.

Is debt consolidation better than declaring bankruptcy?

Debt
consolidation can actually make you debt free with more benefits. It
can be a permanent solution to your burdened finances, while bankruptcy
only provides temporary relief. Consolidating your debt can reduce your
monthly payments by 40-60%. Your credit report will be repaired as soon
as your debts are paid for – not for the next 10 years like with
bankruptcy. You will also be free from the hounding of creditors. In
short, bankruptcy should only be chosen when there is no other choice.
Debt counselors can help with these decisions as well.