Understanding Debt Consolidation And Chapter 13 Bankruptcy

Law Blog

When trying to restructure your debts and pay them down, there are two options. Debt consolidation is a process where you take on a loan that pays off your existing debts and puts everything under one roof with a single obligation. Chapter 13 bankruptcy is a legal process where you ask the court to restructure your debts with a repayment plan that usually runs between three to five years.

Each approach has its strengths and weaknesses. It's important to understand the options you might have before you try to restructure debt so let's look at what you need to know.

Debt Consolidation Does Not Preclude Bankruptcy

Notably, consolidating your debts under a new loan does not prevent you from declaring bankruptcy later. The consolidation process is one that involves you and a private party, and there's no waiver of your right to petition the court for bankruptcy relief.

The appeal of consolidation is that it gives you a chance to avoid taking a major hit on your credit record. Also, there are scenarios where your creditors may allow you to maintain existing credit cards and lines. Bear in mind that abusing the process could leave you with a bigger hit on your record than if you simply proceeded to Chapter 13 bankruptcy. If you're fairly sure you can't afford to pay on a debt consolidation plan, you may want to skip a step and talk with a bankruptcy attorney.


One of the stronger arguments for debt consolidation is that you may be able to set up a longer repayment period. When a judge grants a Chapter 13 petition, it is almost always going to require a plan for you to repay the debts within 5 years at most. There is also a strong possibility the term will be closer to three years.

If you consolidate your debts, you can seek a longer repayment period. Likewise, you might be able to consolidate them again down the road as long as you maintained your repayment schedule.

Force of Law

A big advantage of Chapter 13 bankruptcy is that it carries greater force of law. Your petition will be reviewed by a judge, and the court will grant a stay preventing creditors from harassing you.

The creditors will have the opportunity to question you under oath and to raise objections about your proposed repayment plan. However, the only remedy they have once the court grants your request for bankruptcy is to file an appeal to a higher court. Very few creditors do this because it's expensive and bankruptcy law is well established.

For more information on debt consolidation and Chapter 13 bankruptcy, talk to a law firm in your area like Havner Law Firm about your options.


5 October 2020

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