Bankruptcy, walking away or CCCS, which is better?

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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:

Pros:

>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.

 

Cons:

> 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:

Pros:

> 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.

 

Cons:

> 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:

Pros:

> 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.

 

Cons:

> 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) :

 

Pros:

> 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.

 

Cons:

> 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.

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