Chapter 13 vs. private debt consolidation

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Updated: 4/13/2007 3:35 pm
Private debt consolidation has become an increasingly popular way for consumers to get out of debt. It involves consolidating all of your debts into one affordable monthly payment. In this practice, private debt consolidation services negotiate with your creditors to obtain the lowest monthly obligation needed to satisfy all of your accounts. This is usually done by significantly reducing the interest rates on your debts. You, in turn, must pay one lump sum to the service each month. The lump sum will be portioned out to your creditors accordingly. Your monthly payment will usually be up to 50 percent lower than the sum of your individual account obligations. A Chapter 13 bankruptcy works essentially the same way, but it allows for partial payment to your creditors. So what’s the difference between private debt consolidation and filing Chapter 13 and which is better? Though the concept is nearly the same, there are many differences and which one you choose will be dependent on what needs you’re hoping to meet. If you’re interested in repairing poor credit or maintaining a current good credit rating and you don’t want your debt problems to become public record, then private debt consolidation will meet your needs. Private debt consolidation, however, can’t offer guaranteed federal court protection from your creditors. Creditors don’t have to accept a private debt consolidation plan and can proceed with any legal action against you to collect their debts. On the contrary, they’ll have no choice when you file Chapter 13, even if your repayment plan only pays a portion of what’s owed to them and allows the rest of the debt to be discharged. The bankruptcy court also has the authority to prohibit creditors from repossessing or foreclosing on your property. Private debt consolidation services don’t have this power. Most creditors probably would rather see you enter into a debt consolidation plan, as filing bankruptcy wouldn’t guarantee that they would be paid in full. What’s best for you, however, will perhaps be dependent on which you desire more while you regain financial strength: federal protection from your creditors or maintaining a good credit standing.

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