What Are Some Alternatives to Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a court-enforced solution to major debt problems; unfortunately, Chapter 7 will cause participants to lose a majority of their assets, such as vehicles, household objects and recreational products. Filing a Chapter 7 bankruptcy is also much more difficult because of the Bankruptcy Abuse Prevention and Consumer Protection Act written into law in 2005. Viable alternatives to Chapter 7 bankruptcy do exist; analyze your situation to determine which is best for you.
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Chapter 13 Bankruptcy
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While Chapter 7 bankruptcy is a liquidation of your assets to pay off debt, Chapter 13 is a consolidation. In Chapter 13, a settlement is reached with each of your creditors to pay back a portion of your debt in monthly installments. The monthly payment is paid through the court and disbursed among creditors.
The average Chapter 13 bankruptcy lasts between three and five years, whereas Chapter 7 is generally completed within six to eight months. Chapter 13 is a longer process; however, it does allow you to keep your assets instead of them being sold to repay debt.
Chapter 13 is better for consumers with a number of assets, such as late-model vehicles or a home. Chapter 13 participants must be prepared not to take on additional credit until the program is complete, because acquiring credit (auto loans, mortgages or credit cards) is very difficult in the program.
Debt Management Plans
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Debt management plans are brokered through credit counseling agents rather than the court system. Debt management plans do more than help you consolidate debt, the agencies usually work to help you budget and plan your finances.
Credit counseling agencies work as negotiators on your behalf to lower the interest rates or balances on your accounts. Similar to a Chapter 13 bankruptcy, a debt management plan requires you to make one monthly payment over a specified amount of time (12 to 48 months). The agency takes your payment and disburses it among your creditors, usually keeping a small amount as an administrative fee.
Like the Chapter 13 bankruptcy, a debt management plan will usually help you keep your assets. Unlike in a bankruptcy, consumers enrolled in debt management plans can usually acquire new lines of credit or loans while in the program.
Auto loans, mortgages and other secured debt are usually not included in debt management. The plans are designed to include unsecured debt, such as credit cards and personal loans.
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