Bankruptcy over Debt Consolidation?
Perspectives on Addressing your Debt Dilemma

The following view on selecting bankruptcy over debt consolidation is provided by a representative of Oak View Law Group.

If you’re torn between filing for Chapter 13 bankruptcy or choosing debt consolidation per the advice of many legal eagles, take time to understand the pros and cons of each. 

Here’s the fundamental difference between the two options: Filing Chapter 13 bankruptcy enables you to invoke the jurisdiction of your local bankruptcy court. This will ensure your creditors accept your proposed debt repayment plan.

Why not choose debt consolidation?

The process of debt consolidation is tedious. It requires that you or a representative directly negotiate with each of your creditors to have them reduce the amount you owe and accept a repayment schedule.

As a voluntary arrangement, creditors may not agree to your requested repayment arrangement or they may counter with plan you cannot financially meet.

Debt consolidation provides no requirement that your creditors will even negotiate the debt you owe. Even if they agree to accept a lesser amount to satisfy your financial obligations, they may renege on the agreement at any time at their discretion. Therefore, it is key for you to get any repayment plan in writing from creditors to ensure it will stick.

Be aware that some credit card companies don’t accept every type of debt consolidation payment plan. In addition, there isn’t a cap or limit as to the amount your creditors can ask you to pay back.

Why choose Chapter 13 bankruptcy?

With Chapter 13 bankruptcy, your creditors will be limited in their actions against you. This is assured by virtue of a bankruptcy court’s orders and a subsequent stay on all sorts of legal proceedings sought to collect debt payments from you.

This implies that your creditors stand to lose their right to pursue you for debt repayments, if they choose not to participate in the Chapter 13 proceedings. As a result, you will be able to get a discharge in bankruptcy from your debts, and the relevant discharge order might be enforced against the creditors by the court.

The U.S Congress has set forth in the Bankruptcy Code the amount of repayment that you’ll be required to make to your creditors, based on your present circumstances.

Take for instance, certain Chapter 13 payment plans only require you repay 10 percent or less of your debts to creditors. Then, the remaining outstanding balances owed will be discharged so that you can successfully complete the scheduled repayments.

From an income tax viewpoint, a Chapter 13 bankruptcy discharge does not trigger any liability on your part to pay taxes on the amount of debt forgiven.

To illustrate this, suppose your lender has forgiven a mortgage loan of $100,000. In most circumstances the IRS and state departments of revenue consider forgiven debt as a form of taxable income. 

However, bankruptcy (be it Chapter 7 or Chapter 13) is included in the Internal Revenue Code and exempts you from paying any tax on forgiven debt. This will remain in effect, even if your lender has sent you Form 1099 for tax purposes.

Before you decide bankruptcy is your best solution, talk with your lawyer about the consequences that bankruptcy brings – in addition to the benefits. For more bankruptcy information, click on the articles below.

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Article:  Bankruptcy Over Debt Consolidation

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