Credit counseling programs and filing for chapter 13 bankruptcy are both options for people who have found themselves consumed by uncontrollable debt. Both options help people restructure their debt so that it is more manageable, allowing payments to be within the debtors budget. There is also no property liquidation with either program. While there are a lot of similarities between the two options, there are some significant differences as well. Here is a breakdown of the two different programs.
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To start with chapter 13 requires hiring a lawyer and going to court for a judgment. Your attorney will work to prepare papers to restructure your debts so that they are affordable to you. After documents have been prepared and agreed upon, a trip to court for a judgment is the next step. Most times interest rates will be frozen and sometimes some of the debt may be forgiven. Then, payments begin. Usually under chapter 13 you will pay each creditor individually, but sometimes a trustee might collect the money and disperse it. All parties are legally bound to the terms of the agreement, which means you must make payments and the creditors cannot decide down the road to defer from the terms.
Credit counseling programs do not include a lawyer or the courts. Instead you will hire and work with a credit counseling company. You will be assigned a credit counselor who will educate you on how to most effectively set up a budget and how to efficiently manage your finances. The counselor will be the person who works to negotiate with your current debtors. They will go to bat for you, so to speak, to negotiate repayment terms on your current debts. They work to lower interest rates, remove fees on your accounts and sometimes are even able to settle some of the debt owed. The company will then lump all of your debts into one and charge you a once a month affordable payment. They will then disperse the money on your behalf to your creditors.
One drawback with a credit counseling program is unlike Chapter 13, there is no legal documentation on terms that have been negotiated. It is basically an honor system. Although it doesn't happen often, parties at a later date can decide not to honor the terms of the agreement.
Finally, chapter 13 generally costs more than credit counseling programs. Lawyer and court fees can add up. There are start up and monthly fees with credit counseling, but they usually do not surpass legal costs of chapter 13.
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