Alternatives to Chapter 13

Chapter 13 bankruptcy is not always the best choice. In fact, many debtors who choose Chapter 13 are unable to complete a Chapter 13 repayment plan. Instead of filing for bankruptcy, a debtor can choose other options, such as consolidation, working out an arrangement with creditors, paying creditors through a debt management plan or defaulting on debt.

Consolidate Debt

Combining debt into one payment may make it easier to manage debt. Consolidation options include consolidation loans and a home equity loan or line of credit. A consolidation loan does not decrease the amount of debt owed, but it may have lower payments and a lower interest rate. A home equity loan or line of credit is a good option if a debtor has equity in their home and the real estate market is strong. This type of loan typically carries a very low interest rate, and the interest is tax-deductible. This option, however, does have an element of risk since a creditor can repossess the property if the debtor defaults on the equity loan or line of credit.

Many creditors, especially in economically difficult times, are willing to work with debtors experiencing trouble repaying debt. Creditors may offer payment alternatives, such as lowering monthly payments, creating a long-term repayment plan or reducing the interest rate to as low as zero percent. When bankruptcy is the other alternative, many creditors choose to assist debtors.

A debtor can create a debt-management plan with a credit-counseling agency. Counseling agencies will work on behalf of the debtor to create a plan that both the creditor and the debtor agree on. The debtor will make monthly payments to the counseling agency, which will disburse the appropriate payment to each of the debtor's creditors. The debtor, however, must pay the counseling agency a monthly fee for this service. A debtor should be aware that many credit-counseling agencies receive the majority of their funding from creditors.

If a debtor is "judgment-proof," choosing to default on debt may be an alternative. Judgment-proof means that the debtor has no assets that a creditor can collect or that the debtor only owns exempt property, such as furniture, clothing, public assistance benefits and Social Security. If a debtor is judgment-proof, a creditor will typically not sue a debtor since it will be impossible to collect on the debt.