Chapter 7 Bankruptcy alternatives
The new bankruptcy law encourages potential filers to consider alternatives to bankruptcy. Debtors often do try out private credit consolidation before failing and seeking bankruptcy relief. Under the current law, debtors whose income is too high above the median level for their household size to qualify for a discharge of their debts would have to file a Chapter 13 petition for reorganization if they seek bankruptcy relief. A Chapter 13 petition allows the debtor to keep any assets but provides for repayment to creditors through a court-ordered payment plan based on the difference between the debtor’s income and expenses. This is in one sense similar to private credit consolidation, in which a third-party agent negotiates repayment terms with all creditors while accepting a lump sum monthly payment, including their agency fee, from the debtor. Such payments are often automatically deducted from the debtor’s bank account in order to ensure receipt. Debtors need to affirmatively indicate to the credit consolidation company their desire to terminate such payments, as when they are ready to file bankruptcy. Credit consolidation might temporarily halt an increase in interest and penalties, but these would be permanently eliminated by the Chapter 13 plan, which allows the debtor to pay the total balance owed at the time of filing. Definitely consult with an experienced Chapter 13 practitioner in your jurisdiction in order to determine whether your over-median household income might be a reason to consider Chapter 13 bankruptcy rather than credit consolidation.
