CREDIT COUNSELING DEBT MANAGEMENT PROGRAM VS. CHAPTER 13
Credit counseling agencies serve as a third party between you and your creditors with the goal of reaching settlement terms. Some consumers believe that credit counseling is preferable to filing bankruptcy, because the common assumption is that credit counseling is better for your credit. While successful credit counseling debt management programs (DMP) can improve your debt or credit situation, assistance through a Chapter 13 reorganization or Chapter 7 Fresh Start or is a legal means of debt relief that may offer better settlement terms with court oversight.
Understand the Differences
- Debt Repayments Terms and debt elimination:
- Credit Counseling DMP:
Many of the credit counseling agencies have pre-set arrangements with the credit card companies regarding what repayment terms can be provided (i.e., interest rate reduction, etc.)
- Chapter 13 Reorganization Plan:
The program provides 0% interest repayment on all unsecured debts such as credit cards, medical bills, personal loans, etc. In addition to the benefit of 0% interest repayment, the primary difference is that the Chapter 13 provides legal means to eliminate debt. The program only requires that you contribute your disposable income (i.e., income left over after the payment of necessary and reasonable expenses for support of you and your family) over a 36 – 60 month Plan term (required time commitment depends on your income). Any portion of your debts that cannot be paid during the plan period will be legally eliminated or discharged at the end of the program.
- Creditor approval:
- Credit Counseling DMP:
- Chapter 13 Reorganization Plan:
Since they receive funding from the credit counseling agencies, many of the agencies have working relationships with the larger bank and credit card companies. However, the DMP budget plans are ultimately reliant on all creditors voluntarily agreeing to the payment terms to make the budget work. If one stubborn creditor still demands a higher payment, it may throw off the entire budgeted plan.
Working with you, we propose the repayment plan and submit it to the court. Because the program is based on Federal law, it is approved by the court, not your creditors. One creditor does not have the power to hold up the whole process or demand terms other than what is set forth under the law. In fact, to the contrary, creditors falling into the same classification of debt will be paid identically in a Chapter 13.
- Creditor Payments:
- Credit Counseling DMP:
- Chapter 13 Reorganization Plan:
Most DMP programs establish a budget and monthly payment amount. You begin making payments while they are negotiating with creditors. The agencies typically hold on to the funds until an agreement is reached or they have a significant dollar amount to offer payment terms to the creditor (i.e. $.50 on the dollar).
In the meantime, your credit is blemished by reports of late payment to the credit rating agencies. Payment history accounts for 35% of your credit score according to FICO, so late payment can quickly have an adverse effect on your credit.
Also, a lot of creditors are wise to the fact that they are being held at arm’s length by the credit counseling agencies and may seek to get a judgment and eventual wage garnishment to expedite their repayment. If this happens, you will be not only be paying into the DMP to settle the debt, but you will also have money taken directly out of your paycheck. This can create other budget issues, such as a shortage of funds to pay a mortgage or car payment.
Creditors begin receiving payments under the Chapter 13 plan once the case has been confirmed by the court. This typically occurs within 3 – 4 months after case filing. They are paid by a court-appointed Trustee and the order in which they are paid and the amounts they receive are dictated by the proposed repayment plan proposed by your attorney and the bankruptcy laws.
While you are in a Chapter 13, you are protected from judgments and wage garnishments. You are also protected from late reporting to the credit scoring agencies.
Once the Chapter 13 plan has been confirmed by the court and payments commence to your creditors, they will begin receiving consistent and timely payments from the Trustee. Between this payment history improvement and the monthly reduction to principal debt, you can expect your credit score to improve as you move through the program.
- Legal Protection (from Judgments, Garnishments, Foreclosure, etc.)
- Credit Counseling DMP:
- Chapter 13 Reorganization Plan:
The creditor arrangements are voluntary and non-binding. At any time during the process, individual creditors could demand full payment, begin formal legal proceedings, often times culminating in a writ of garnishment or other actions such as home foreclosure, asset seizure, car repossession, etc.
The Chapter 13 program provides legal protection from all creditors. Creditors are bound to the terms of the court approved plan and have to follow court procedures and noticing requirements to request any changes to the payment schedule or court protection.
The Chapter 13 program provides broad legal protection, and can instantly stop phone calls, letters, judgments, wage garnishments , home foreclosure , car repossession , IRS tax levy , utility shutoff, etc.
We understand that it can be difficult to discern which pathway will provide the best outcome and resolution for your financial circumstances. That is why we offer a free, confidential consultation with one of our licensed attorneys. We review your debt, income and budget and provide you with an honest assessment of your available options. The power is in yours to improve your finances, we are a helping hand to get you there. Please call us toll free at 866-261-8282 or click here to schedule a consultation right now.
