NY Attorneys Examine How Bankruptcy Compares to Debt Repayment Plans
Although Chapter 13 Bankruptcy appears to be a type of Debt Management Plan, because it has the power of federal law behind it, the benefits that it provides are much greater than those afforded by traditional Debt Repayment Plans (formulated by credit counseling services) or other “Debt Consolidation” programs:
1. An Automatic Stay is created immediately upon the filing of a Chapter 13 bankruptcy. This stay prohibits further collection activities and brings an immediate halt to foreclosures, repossessions, garnishments, lawsuits and creditor harassment. Other types of “Debt Management Plans” lack the force and effect of the Court Ordered Automatic Stay, and your creditors are free to continue on their rampage.
2. Traditional Debt Repayment Plans created by Credit Counselors do not deal with important debts like mortgage debt, car payments, income tax debts, child support and, often, debts already under litigation. Chapter 13 addresses most types of debt, including those listed above, allowing them to be repaid through the monthly payment made to your Chapter 13 Trustee.
3. Chapter 13 allows you, in many cases, to repay only a fraction of your unsecured debt (as little as 10%) without interest or penalty. On the other hand, in Debt Repayment Plans formulated by Credit Counselors you typically have to repay 100% of the debt owed, although the interest collected can be at a reduced rate.
4. Unsecured creditors “run the show” in Credit Counseling programs. If the interest is reduced, the creditor dictates how much the reduction will be, and the creditor can stop participating at any time, without any explanation. In Chapter 13, creditors are bound by federal bankruptcy law and face severe consequences for non-compliance. In addition, unsecured creditors in Chapter 13 receive no interest (in most cases) or late fee payments.
5. Chapter 13 Plans are between 3 years and 5 years long, so there is “an end in sight.” At the conclusion of the Plan, all dischargeable debts no longer have to be paid. Other types of Debt Management Plans and Debt Consolidation programs often drag on and on, with very little debt actually being paid off.
6. In many Debt Consolidation loans, you have to pledge some of your assets (i.e. your house or a car) as collateral for the loan. Effectively you are eliminating an Unsecured Debt by creating a Secured Debt in the same amount. You put your house or car at risk in the process. In Chapter 13, you do not have to pledge any of your assets in order to achieve a “consolidation” of your debts.
7. In Chapter 13, the Discharge eliminates any debt owed to unsecured creditors who did not participate in the Chapter 13. In Credit Counseling repayment programs, a creditor who does not participate is still owed their entire debt, plus interest and fees.
8. Your Chapter 13 attorney is ethically obligated to protect your interest and zealously represent you. Many credit counseling programs are actually funded and/or controlled by the creditors, the very same creditors that are hounding you.
9. Any Chapter 7 Bankruptcy eliminates the obligation to repay a debt, while a Debt Repayment Plan formulated by a Credit Counseling service simply reduces the interest you have to pay. You still have to repay the entire debt and some/most of the interest.
10. Bankruptcy can stop salary garnishments, restraints on bank accounts and discharge certain federal and state income tax debt. Credit Counseling and their Debt Repayment Plans can do none of this, as it does not have the full weight and authority of federal law behind it.
11. The bankruptcy system is controlled by federal law and regulations, and the players in the bankruptcy system (i.e. judges, lawyers, etc.) are all licensed to practice law and their every action is controlled and closely scrutinized by State Bar Associations and other screening committees. Credit counseling, on the other hand, is like the “Old West.” It is subject to very little regulation (some would say none) and the rules of the game are seemingly made up by the players (i.e. the credit industry) and always subject to change.
The credit counseling industry has a troubled history
Traditional credit counseling agencies offered a variety of services, ranging from financial and budget counseling to Debt Management Plans. However, as the practice evolved, it became apparent to those monitoring this industry that the agencies began to push consumers into the Debt Management Plans, regardless of whether or not the consumer would benefit. For detailed studies and reports outlining abuses occurring in the credit counseling industry, and the reactions of government and the industry to these abuses, visit the website of Consumer Federation of America, a major consumer protection organization, at www.consumerfed.org. (Click on “Finance”, then click on “Credit and Debt”, then click on “Credit Counseling.” Sometimes the website has a direct link from “Finance” to “Credit Counseling.”)
Our experienced bankruptcy attorneys can obtain a much more favorable result for you than you could obtain through Debt Consolidation Loans on Credit Counseling Plans.