What’s the Difference Between Chapter 13 Bankruptcy and Debt Consolidation?

Posted on Dec 31, 2015 By Nick Gajewski

Lawyer Nick GajewskiThere’s no denying that many people still feel nervous about filing bankruptcy.  They know they have financial problems, but they tell themselves “Bankruptcy is only for people who don’t have jobs, right? Surely I don’t need to file an actual bankruptcy case.”  More often than not, people in this situation start considering debt consolidation through a private company.  Even though a Chapter 13 bankruptcy case is commonly called a “debt consolidation,” there are a few very important differences.

Debt Consolidation Companies Won’t Help

Most consolidation companies will tell you that they are going to negotiate to reduce the debt you actually pay back to your creditors.  They’ll have you begin making payments to them instead of to your creditors.  You may think that as long as you’re making payments, that will solve the problem.  Unfortunately, that isn’t true.  In most cases, the payments a person makes to a consolidation company just go straight into that company’s pocket.  Nothing actually is paid on your debts, or, even if the creditor is paid something, it isn’t enough to offset the amount of interest that has accrued.  In a Chapter 13 case, most debts aren’t allowed to accrue any more interest.  The payments you make immediately begin to pay down the principal amount of the debt.

Difference Between Bankruptcy and Private Debt Consolidation

The other key difference between a Chapter 13 and a private consolidation is that private consolidation companies don’t actually have any power over your creditors.  Although they state they will try to negotiate lower debts, only the Bankruptcy Court has the legal authority to reduce debts.  Outside of a Bankruptcy case, your creditors don’t have to participate in any consolidation or negotiations.  A lot of times I meet with people who say they were in a consolidation, but now they’ve been sued by a creditor anyway and they’re about to have their paycheck garnished.  In a Bankruptcy case, creditors have to participate in order to have a chance of being paid anything.  If they don’t cooperate with the Court’s rules, then the debt can be completely wiped out.  In addition, the Court protects you with the Automatic Stay.  So even if a creditor refuses to participate in the case, they are still prohibited by law from trying to collect on the debt.

Certainly, this isn’t to say that Bankruptcy is for everybody, but if you’ve got financial worries and you haven’t considered filing a Bankruptcy case, please call one of our Bond & Botes affiliated offices.  We offer free initial consultations to help you decide if Bankruptcy can help you.  Our attorneys have years of experience helping people find a path back to financial stability.