Bankruptcy Chapter 13; Debt Management; and Debt Consolidation
They are are all the same, right?
No. But, we often get asked that question.
Or at least, there seems to often be a misconception that Chapter 13 Bankruptcy and Debt Consolidation are the same — all debt must be repaid. While there can be 100% Chapter 13 cases, this is not the norm.
So, here is a general breakdown of these three options:
| Chapter 13 Bankruptcy | 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 |
As always, what is going to be best for you — is going to depend on your situation.
We do have some additional thoughts on debt settlement if that is something you are considering.