Chapter 7, or “liquidation” bankruptcy is the most straightforward path to bankruptcy relief for most of the people I talk to who are seeking bankruptcy relief (called “debtors”).
However, some debtors do not qualify for Chapter 7 bankruptcy, either because their income is above the gross median income or they have assets that I cannot protect with exemptions. For these debtors, Chapter 13 bankruptcy is the way to go.
In a Chapter 13 bankruptcy, the process is very similar to that in a Chapter 7 bankruptcy. The main difference in a Chapter 13 bankruptcy is that the debtor will need to pay something to their creditors, whereas in a Chapter 7 bankruptcy, most debtors do not have to pay anything to their creditors.
Some debtors balk at the prospect of paying their creditors in a Chapter 13. They wonder if they would be better served by working with a debt consolidation company and skipping bankruptcy all together.
The biggest advantage of filing a Chapter 13 bankruptcy over working with a debt consolidation company is that by working through the bankruptcy system, debtors can settle their debts without the enormous pressure of the threat of being sued by their creditors.
You see, when debtors work with a debt consolidation company, they stop paying their creditors and instead pay at least some of their disposable monthly income to the debt consolidation company. After about 6 months of not getting paid, the creditors that have stopped getting paid start their debt collection process, which, most of the time, includes suing debtors to recover the money owed. The debt consolidation companies then negotiate with the debtor’s creditors to settle the debtor’s debts, using part of the money that the debtor has been paying to the debt consolidation company.
Some creditors are agreeable to settling in order to avoid the costs of suing debtors. Some creditors, on the other hand, are not agreeable at all and will use the threat of getting a judgment against the debtor to try to get the debtor to pay every penny.
On the other hand, when debtor file a Chapter 13 bankruptcy, all collection activity on their debts stop. Creditors have to ask a bankruptcy judge for permission to sue to collect the money owed. This removes a creditor’s biggest bargaining chip: the threat of getting a judgment against the debtor.
In the end, with debt consolidation companies, you peace of mind is at the mercy of your creditors. With a Chapter 13 bankruptcy, you can begin to take back your peace of mind and start down a path to freedom from debt!
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