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Chapter 13 Bankruptcy vs. Debt Consolidation

Deciding which option is the best for you is the first step you need to take in order to start paying off your debt. Chapter 13 bankruptcy and debt consolidation are two options to think about with your lawyer.

What is Chapter 13 bankruptcy?

Chapter 13 bankruptcy is essentially a repayment plan. When you file for Chapter 13 bankruptcy, you establish a steady payment plan by using part of your income to gradually pay off your debts. Your payment plan can be anywhere from three to five years long, depending on your income status. It also doesn't require you pay off all of your debts, only a percentage, as long as you stay on course with the plan.

If you follow through with your plan and make all payments, at the end of the three to five year period, all of your debts will be forgiven and you can start with a clean slate. You also must be able to show a judge that you have completed a budget-counseling course.

Chapter 13 bankruptcy is regulated through the court system. This is beneficial to you because, if your creditors violate any part of your agreement, there can be serious penalties for them.

What is debt consolidation?

Debt consolidation is combining all of your debts into one bill and paying that bill off with a loan -- which you also pay off over time. While this route may be convenient because you only need to write one check instead of multiple checks per month, a debt consolidation agreement is typically not legally binding, and the creditor may change its mind and end the payment plan. Additionally, debt consolidation may require you to negotiate with each of your creditors.

By contrast, with Chapter 13 bankruptcy, you make payments to a trustee who then distributes money to the various creditors, while you don't have to interact with them again. Chapter 13 also places an automatic stay on creditor actions.

Have a plan and talk to a professional.

When you are trying to eliminate your debt, it is helpful to do two things: have a plan and consult with a bankruptcy lawyer.

You need to have a plan and a budget in place whenever you find yourself in a difficult financial situation. It is also helpful to have a lawyer on your side to negotiate terms with creditors and courts to ensure that you are receiving the best payment plan possible.

For more on these matters, please see our Ohio bankruptcy overview.

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