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If you default on a debt consolidation or debt settlement agreement, the fees owed to the debt consolidation company and remaining creditor debt is normally dischargeable. Often, clients hire a bankruptcy lawyer after they have failed to complete a debt consolidation plan. Unfortunately, they may have paid far more money on their unsuccessful debt consolidation plans than if they had hired a lawyer to file a chapter 7 or chapter 13 bankruptcy case.

What Are The Benefits To A Debtor Filing Bankruptcy Versus Signing Up For A Debt Consolidation Or A Debt Settlement Program?

First and foremost, a chapter 13 or a chapter 7 bankruptcy is a more structured method to deal with a chaotic debt situation. In debt consolidation situation, if the debt consolidation company cannot achieve negotiated resolutions with approximately 90% of the creditor body, the plan will usually fail. When you file a chapter 7 or chapter 13 bankruptcy, there is an automatic stay preventing the filing of lawsuits against you during your case.

In a chapter 13 case, you seek to discharge the difference between what you pay under the plan versus what was paid to the creditors. So, if a debtor propose and confirms a Plan distributing 30% to creditors at the end of the 3 to 5-year period in a chapter 13, the other 70% of the debt will be discharged upon successful completion of the Chapter 13 Plan. More significantly, there will be no discharge of indebtedness income. The IRS regulations for tax debt that is forgiven outside of a Bankruptcy case classify the amount of the debt extinguished as ordinary income.

The structure of paying a chapter 13 trustee is preferable because their fee structure is fixed. The maximum amount of a Chapter 13 Trustee’s compensation is 10% of all disbursements to creditors. In many cases, the Trustee fee charged is closer to the 8 or 9% of the total funds received that they distribute to creditors.

If I’m In A Debt Consolidation Program And I Can’t Afford The Payments, Can I File Bankruptcy With This Type Of Debt?

A Bankruptcy case can address any remaining debt that is not paid from the debt consolidation company to creditors and also discharge any remaining fees owed to the debt consolidation company. In most instances, no debt is owed to the debt consolidation company, because they deduct their contractual fees once payments are made. The frequency of the distribution to creditors from the debt consolidation companies is sometimes erratic. A chapter 13 trustee makes disbursements every month of amounts that are in their accounts. A debt consolidation company may pool the money for several months and not actually make structured distributions to creditors.

What Are The Benefits To A Debtor Filing Bankruptcy Versus A Debt Consolidation Settlement Program Or Other Predatory Lenders?

Bankruptcy cases, while requiring a considerable amount of disclosure and preparation are a more uniform structure to address the overall debt situation of a client in a prompt manner. Very frequently, debt consolidation programs drag on for several years and require higher payments to fund payments to creditors who do not agree to the consolidation plan and file lawsuits.

For more information on Debt Settlements in New Jersey, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (908) 373-8500 today.

Michael McLaughlin, Esq.

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