Should You Choose Credit Counseling or Ch. 13 Bankruptcy?

Some financial situations make it obvious that the debtor needs to file for banckruptcy relief, where financial obligations can be repaid or discharged through the court system.  However, not every financial situation carries with it a clear need to file for bankruptcy, and clients often ask about the viability of going through credit counseling as an alternative to filing for bankruptcy.

It is understandable that people can and should perform extensive research and consider all of their options in difficult financial situations, even including debt consolidation and credit counseling. However, in most cases, filing for bankruptcy has significantly more advantages than credit counseling programs.  Let’s take a closer look.

The Benefits of Chapter 13 Bankruptcy

There are significant benefits to using Chapter 13 as a way to relieve financial pressure while still satisfying debts to creditors. The total amount of all repayments is nearly always less than, but sometimes equal to, the amount of funds that will be used to repay the debt outside of a filed bankruptcy. This is often true even if the court requires the debtor to repay 100% of the total amount of debt during Chapter 13 bankruptcy proceedings.

This is often due to numerous factors such as the individual’s expenses and income. It will be the bankruptcy court that decides the amount of debts that are discharged in a Chapter 13 bankruptcy case. The court will decide that the individual or couple will repay the debt percentage anywhere between 0% and 100% of every unsecured debt. The debtors have anywhere from three years to five years to pay back any of the arrears, or percentage of the arrears, along with making their monthly routine payments.

Why Chapter 13 Is Better Than Consolidation

There is a significant advantage to using a Chapter 13 bankruptcy case to help manage debt through an affordable repayment plan. In debt consolidation, the debtor is required to pay all of the accrued interest on all unsecured debts, which will not happen in a Chapter 13 bankruptcy.

No matter what terms are set via a debt consolidator, the debtor will almost always have to pay interest. However, in Chapter 13, the debtor will have up to a maximum of five years to pay on the monies owed to outstanding creditors, without the need to pay the accrued interest.

Many individuals and families simply have too many assets or too much income, making them ineligible to file a Chapter 7 bankruptcy. However, they are still having significant issues in their attempts to manage their monthly obligations on all outstanding unsecured debt and credit cards.

In cases like that, it is important to look at the options of filing for Chapter 13 bankruptcy. With the ability to pay off all or a portion of outstanding debt over the course of five years, nearly any family or individual can relieve their financial burdens and the stress of dealing with creditors knocking at the door.

Can the two work together?

The findings from a 2010 study conducted by the Univeristy of Illinois suggested that going through credit counseling was beneficial to bankruptcy debtors after the fact, as the counseling did show a meaningful impact on the specific areas of improving the knowledge of the debtor as well as helping to change their behavior when it comes to money management.  The study indicated that the improved knowledge and awareness were helpful to debtors for staying out of trouble with their finances in the future.  So while bankruptcy is still the preferred method for provding financial relief for debtors, credit counseling has proven beneficial for the purposes of education and lifestyle changes after the fact.