The best bankruptcy option for some debtors is a chapter 13. The reasons differ per debtor; however, usually it is because their income is too high for a chapter 7; they are behind on their mortgage and want to keep their house; they are behind on a car; have non-exempt property they wish to keep; and other various reasons. People will ask during a bankruptcy consultation what other debt relief options are available to them instead of a chapter 13. The most common options are a debt management plan or debt consolidation.
| Chapter 13 | Debt Management Program | Debt Consolidation | |
| Monthly Payments |
Plan payments are determined on a case by case basis usually without regard to the total debt owing in the case |
Payments are determined by creditors |
Payment determined by overall debt balances and total consolidation amount |
| Interest rates |
Discount interest rate set by court for secured creditors. No interest accrues on credit card debts. |
Interest rate determined by agreement signed with creditors or a lower interest rate as agreed upon by creditors |
Interest rate is set by the terms of the new loan |
| Creditor cooperation |
Creditors do not choose to opt in or out of the plan – required to go through the bankruptcy |
Creditors can choose not to enter the debt management plan created by the company hired by the debtor. May result in paying towards Debt Management Plan and directly to some creditors. |
Creditors do not opt in/out as they are paid in full by new debt |
| Length |
Case is open 3-5 years |
Commonly 3-5 years |
Set by terms of new loan |
| Tax consequences |
Debt not paid in full during the case and discharged (credit cards, medical, pay day loans) is not taxable |
Cancelled debt is taxable as income – creditors will send a 1099 |
No tax consequences as debts have been paid in full with new loan |
A debt management plan requires a debtor to hire a company to work out a plan with their creditors. Creditors are not required to participate and some creditors do not work with some debt management companies. The debtor will pay the company a set-up fee and a monthly fee to handle the plan. The debtor will make a payment to the company and they will divide amongst those creditors who have agreed to the plan. If creditors have not agreed, the debtor will need to continue to pay those creditors directly.
If you are considering hiring a debt management company check to ensure they are registered to do business in your state and it is best if they are non-profit companies. The State of Kansas, Office of the State Bank Commissioner, has a List of Approved Registered Credit Services Organizations. These are the only organizations that are authorized to engage in debt management services with Kansas residents.
The State of Missouri residents need to search for debt management companies through the National Foundation of Credit Counseling
Another debt relief option, debt consolidation requires the debtor to take out new debt to pay the current debt in full. The debtor is usually trying to gain a lower monthly payment and hopefully lower interest rate. If the debtor cannot make the monthly budget work or takes out additional debt while paying the consolidation loan, then the debtor may still need to look into bankruptcy options.
Chapter 13 bankruptcy is the only debt relief option that forces the debtor’s creditors into a plan. The automatic stay will go into effect the day the case is filed forcing creditors to stop any collection efforts outside of the bankruptcy case. The debtor will be able to catch-up on a mortgage or car loan during their case. The debtor’s monthly plan payment is determined by income, expenses, secured debt, and priority debt. Many debtors will not pay all their unsecured debt in full during their case, any unsecured debt that is not paid in full during the case will be discharged at the end of the 3-5 year plan without any tax consequences.
We encourage debtors to contact our casual office for a Kansas City bankruptcy consultation when reviewing their debt relief options so they are informed of how bankruptcy can help. Our bankruptcy attorneys will review the debtor’s situation and let them know if bankruptcy sounds like a good solution to their circumstances.