Credit Counseling vs Chapter 13
Credit counseling is designed specifically to help clients learn about proper financial management and learn how to get themselves out of a debt spiral. Chapter 13 Bankruptcy Reorganization is a useful tool for when you are not able to get your financial picture under control.
Everyone wants to have a good financial situation; but, sometimes things just go wrong, or we get ourselves into a bad situation. Financial issues can come about with bad financial planning, overspending, or because of a tragedy that costs you work, time, medical bills, or both.
What’s important is that you take steps to get your financial house in order to avoid negative credit reporting. Odds are, if you are looking into either counseling or bankruptcy, you already have a lowered credit score. Credit counseling and/or Chapter 13 Bankruptcy will help you create a new financial plan, pay off debt, and improve your credit.
So, how do you know which is the right option for you? First, review your overall financial picture, review the aspects of credit counseling, review the aspects of Chapter 13, and then decide which is the best option for you.
Your Financial Picture
A great deal of thought needs to be brought to analyzing your overall financial picture. First, you need to identify your debts as compared to your assets, figure out which ones are costing you the most, and decide if you can make the necessary changes on your own.
Debts vs Assets
When you sit down to review your financial picture, be purposeful in dividing your debts and assets into appropriate categories:
- Credit Debt
- Loan Debt
- Cash on Hand
Credit debt would be any credit card you hold: bank cards like VISA, Mastercard, Discover, or AMEX; retail credit cards such as Sears, Best Buy, Lowes, or other retailers; or lines of credit from banks, which are usually only accessible through electronic transfer.
These kinds of debt will always be costing you money because of interest. Even though you may consider a low interest rate a good thing, if you aren’t paying off your credit card every month, it’s costing you money. Bank cards tend to have lower interest rates on purchases, but the cash advance interest rates are exorbitant.
Lines of credit offered by credit unions or banks are like an emergency fund that you pay interest on if it is not paid off every month. The rates on these types of accounts tend to be lower, but lower isn’t zero. Every month, you are losing money.
Retail credit cards have some of the highest interest rates, the most unforgiving late fees, and extra charges if you don’t pay your bill right on time. They are also limited in scope – they can only be used at the stores listed on them.
Loan debt would be anything considered a secured or unsecured loan from a financial institution. These are generally mortgages, payments on cars, luxury items, or personal loans. It can also include student loans, whether federally subsidized or not. If you default on a loan, the bank can repossess your property or sue you for defaulting.
Assets would be anything you can sell to help pay off debt. This can include stocks and bonds, insurance policies, cars, homes, or personal items of considerable worth – such as collector’s items or antiques.
Cash on hand is just that – how much cash do you have access to? If you have a rainy day fund in a savings account, it could be used to help pay down debt, but then you wouldn’t have money for any emergencies. You have to determine which is healthier for your financial picture.
What to Pay Off First
Now that you have a sense of your debts and assets, let’s decide what to pay off first. Always start with credit cards as their interest rates and fees are higher than any other debt you may have. Okay, how am I going to do that? You can sell some assets or take on another job to help pay down the credit cards.
Next, consider your cars. If you owe money on them, start paying them off as quickly as you can. Banks that hold the loans on cars are not at all shy about repossessing a vehicle if the payments are continually behind.
What about my house? Shouldn’t that be a priority? Not necessarily. When it comes to defaulting on debt, credit card companies will slap you with charges and penalties and fees continuously. Mortgage lenders tend to want to work with you to help you keep your home. They are more patient and more willing to come to some temporary agreement to bring your payments up to date.
Can I Change without Counseling?
If what you have read so far makes sense to you and you think you can work it out yourself, then do so. However, it is always a good idea to get a second opinion. Many people don’t understand the finer points of credit counseling or how counselors can help you negotiate with creditors for lower rates or alternate payment plans.
So, it may be possible for you to get your debt under control without the aid of a credit counselor, but they have a great deal to offer that you may not know about.
When choosing a credit counseling agency, determine if you would rather work with your counselor on the phone, in person meetings, or online. There are agencies accredited in all 50 states, but most only offer in-person counseling. The cost of services varies by agency, location, and the person’s financial need. Don’t commit to anything until you know what it will cost you.
Once you make the decision to go ahead with credit counseling, make sure you find an agency that is non-profit in nature. They are more able to give you free services if needed or reduced rates based on your finances. They also have no interest in selling you new financial products.
A visit to the credit counselor can be daunting. For many people, it can be a shameful experience. But, it shouldn’t be. Admitting you need help and seeking it out is often the best thing you can do for yourself and your finances. Don’t worry – credit counselors have seen dozens of people in your position and they are trained to help you – without judgment!
Once you have an appointment with a credit counselor, he or she will give you a list of what you need to bring to your meeting. Many of them will simply ask you to forward the information to them via email, but it is recommended that you have paper copies to look at as well to speed up the process.
Some of the documents you may need to bring include the following:
- Tax returns
- Income statements
- Bank statements
- Credit card bills
- Loan documents
- Mortgage statements
- Investment portfolio reports
Each of these documents helps your counselor get a solid idea of what you are working with in terms of debt versus income. During your appointment, you will review all of the documentation and make decisions about how best to solve your financial problems. There are several key services available from credit counselors:
Budgeting: When you first meet your counselor, you will review your debts and assets. If possible, your counselor can help you write a budget that can help you get out of debt, catch up on payments, and pay any late fees. Sometimes, just knowing what a budget is and how to properly use one is enough.
Debt management: Management of debt usually consists of consolidating your debt into a single payment. That payment then pays off your debt, generally at a lower interest rate, over a course of two to five years.
Bankruptcy: If your finances are irreparably damaged, then bankruptcy may be the best choice for your situation. Chapter 13 Bankruptcy Reorganization is designed specifically for consumers who have done everything they can to fix their financial problems and nothing is working.
Once you meet with an attorney and take the required credit counseling course, it may be down to the decision to engage in Chapter 13 Bankruptcy Reorganization.
Chapter 13 Bankruptcy
There are multiple reasons why Chapter 13 can be a good option. But, it is important to know that while bankruptcy can be a chance to get reorganized and start from scratch, it negatively affects your credit score and the ability to get credit in the future.
Chapter 13 bankruptcy may keep you from losing your home and car. It can also stop wage garnishment. One thing it cannot do is erase student loan debt. Given the current student loan debt crisis, it is critical for people to understand that such debts cannot be erased in any circumstances without government programs (like teacher forgiveness).
And be aware – the process can take upwards of six months to complete. While credit counseling can often be done in one session, bankruptcy requires multiple court filings, meetings with creditors, and a waiting period prior to discharge. There is also no guarantee that you qualify to file for bankruptcy or that your bankruptcy will be discharged. It could be denied if the court feels you have other options that better suit the situation.
The bankruptcy law requires that you complete two courses – one prior to filing and one after. These are not the same as meeting with a credit counselor for an informal meeting. These are educational courses that you must pass in order to secure a certificate that will be submitted with your bankruptcy paperwork.
If you are planning to file Chapter 13, you must agree to a three- to five-year repayment plan for your creditors. Once the terms of the plan have been met, any leftover debt is expunged. There are other Chapters of bankruptcy that can be filed by consumers (Chapter 7 is the next most often used), but Chapter 13 helps you improve your credit more quickly.
Anyone with a steady stream of income can file for Chapter 13 bankruptcy, as long as they meet the debt requirements. If their income exceeds the median level allowed by their state of residence, the debt repayment timeline is five years. For income under the median, repayment plans are for three years.
To qualify for Chapter 13 bankruptcy reorganization, you must meet certain qualifications:
- Regular income (a steady job)
- Provide up-to-date tax returns
- Unsecured debts can’t be more than $394,725
- Secured debt can’t be more than $1,184,200.
- You can’t have had a bankruptcy denied within 180 days for a failure to appear in bankruptcy court
- You can’t have received a discharge from a Chapter 13 bankruptcy within the previous two years
- You can’t have received a discharge from a Chapter 7, Chapter 11 or Chapter 12 within the previous four years
The process for filing is pretty straightforward, but it is in your best interest to hire an attorney to help you through the process. Chapter 13 filing usually takes about 95 days from filing of the petition to approval of the repayment plan.
Here are the steps that typically occur over a Chapter 13 bankruptcy:
- Complete credit counseling from an approved agency — within 180 days before filing.
- Hire an attorney to help with preparing the paperwork
- Compile a list of creditors and how much you owe
- Provide evidence of a steady income
- Prepare a list of property and valuables
- Provide recent tax returns
- Provide a list of your living expenses
- File a bankruptcy petition with the local bankruptcy court
- A certificate of completion for the financial management course
- Submit a repayment plan within 14 days of filing the petition
- Start following the repayment plan within 30 days after filing the bankruptcy case
- The court will assign a trustee, who will review the case and meet with creditors
- The trustee will set up a creditor meeting between 3 to 7 weeks after you file the petition. Here, you will answer questions under oath about your debt and the proposed repayment plan.
- You will attend a confirmation hearing within 45 days after the creditor meeting when the judge will decide whether or not to approve the plan.
If you meet the requirement of the repayment plan, the bankruptcy will be discharged. However, you must have taken the second bankruptcy course from an approved agency to have a shot at discharge.
There are options for everyone when it comes to Credit Counseling versus Chapter 13 Bankruptcy. Just remember that whatever choice you make, the important thing is to get your debt under control, make a budget, stick to it, and rebuild your credit as quickly as you can.
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