Discharging your debts in a chapter 7 bankruptcy, paying them through the courts in a chapter 13 bankruptcy, just stopping payment and walking away, or setting up a Debt Management Plan though a credit counselor- which is better?
That depends on your situation. Let's look at the pros and cons of each:
Chapter 7 bankruptcy:
>Your debts are discharged (eliminated) by the courts. They can never be collected- by anyone- at any time.
>Creditors cannot prevent you from discharging their debts (unless you have committed fraud or violated the "luxury purchase" rules)
>Some creditors view chapter 7 as a "fresh start" and may grant you new credit relatively soon after discharge.
>Chapter 7 will stop collectors, collection calls, lawsuits, foreclosures and repossessions in their tracks. Creditors may even be forced to return money or assets they seized from you.
> You have the power of the bankruptcy court behind you should a rogue creditor violate your discharge in the future.
>There are no tax implications of a discharged debt. You cannot be 1099'd.
> You have a public record "bankruptcy" on your credit for up to 10 years. This may cause problems with employment, rental housing, insurance rates, and of course- future credit.
>You may lose assets that are not "exempt". Each state has specific exemptions in a bankruptcy filing.
> You may have to reaffirm (exclude from discharge) certain loans (commonly auto and mortgage) or be forced to return the auto or lose the home.
> You cannot file if you don't pass the "Means test", which considers your income and expenses.
> You cannot file another 7 for many years after discharge, leaving you vulnerable to lawsuits, underinsured accidents and medical events.
Chapter 13 bankruptcy:
> there is no "means test". You only need to have sufficient disposable income to fund a repayment plan of some sort.
>You are not required to give up assets that are not "exempt".
>You may be able to "cram down" certain loans to market value. (typically cars and second mortgages)
> Like chapter 7, stops collectors, lawsuits, foreclosures and repossessions in their tracks.
> you may not have to repay all debt at 100%, you may pay less and have the remaining balance discharged.
>Some creditors view chapter 13 as less negative than a chapter 7.
> Chapter 13 may remain on your credit report for 7 years instead of 10 for a chapter 7.
> You will be required to live on a court-ordered budget for 3-5 years.
Such budgets rarely have headroom for savings or emergencies.
>You have a public record "bankruptcy" on your credit for up to 7 years. This may cause problems with employment, rental housing, insurance rates, and of course- future credit.
>If you cannot complete the plan you will be dismissed and all protections against creditors will be lost.
> Unlike a chapter 7 that is over with in 90 days, a chapter 13 plan can carry on for 3-5 years. You cannot generally open new credit or begin rebuilding until the plan's completion.
Stop paying and walk away:
> No cost involved. No lawyer's or filing fees.
>You repay zero % of your debt, or another amount to be determined by a future settlement.
>You don't lose assets unless you are sued, lose and are garnished, levied or lien'ed.
> If you are "judgment proof" ie: no income or live in a "no garnish" state, no money in the bank, no assets, suing you is pointless.
>You may be able to settle the accounts for a fraction of the totals owed within a few months of charge off.
> You can be sued, wages garnished, bank accounts levied, possibly a lien placed on real property.
> Your credit will most likely be heavily damaged or destroyed, raising rates on insurance, hindering certain employment or housing rentals and making future credit impossible.
> You may be subject to incessant collections calls and letters.
> Secured property may be foreclosed or repossessed. You may be unable to use a bank account for fear of levy.
> You may have judgments placed against you that can be renewed for decades.
Debt Management Plan (consumer credit counseling) :
> You may pay a lower consolidated monthly payment than you were paying in individual payments.
> You may be offered lower interest rates.
> You may have late, over limit and other fees waived.
> You will make just one payment for included debts instead of several separate payments.
> Collection calls should stop, creditors agreeing to your plan have no reason to sue you to collect.
> Minimal damage to your credit in the long run, assuming the plan is implemented properly.
> Some creditors view completion of a DMP as a positive event and will grant you credit or re-open accounts based on your plan payment history.
> A DMP is voluntary for you and the creditors. There is no guarantee they will accept or continue a plan.
> Repayment is generally 100% of your debt.
> A DMP provides no protection from lawsuits, errant credit reporting, foreclosure or repossession. (although creditors paid on time have no incentive to foreclose or repossess)
> Under certain circumstances you may be reported "late", or have your accounts charged off, damaging your credit.
> Your accounts may be noted as "managed by CCCS", preventing most new credit while the notation lasts.
> Exiting the plan early may have serious negative implications including reversal of concessions and extremely high interest rates.
> A typical plan lasts 3-5 years, delaying credit rebuilding until it's completion.
Bankruptcy, walking away or CCCS, which is better?
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