Two of the most popular strategies for debt management are bankruptcy and debt consolidation. Read on to discover the benefits and disadvantages of using either of these methods and how to decide which is best for you.
What Is Debt Consolidation?
As the term implies, debt consolidation entails taking out a single loan to pay off various debts. The strategy minimizes high-interest rates across many debts and leaves you with a single monthly payment as opposed to tracking multiple payments.
Debt consolidation isn't always the go-to for safeguarding your financial future. Without careful diligence, over the long term, consolidation can cost you more. If your loan is secured, you could lose property where, upon default, the process calls for you to turn over collateral.
There is one great benefit to consolidation compared to filing for bankruptcy. Unlike bankruptcy, which becomes a matter of public record, taking out a debt consolidation loan isn't public. Consolidation will not have the impact on your credit score that going to federal bankruptcy court will.
What Is Bankruptcy?
Bankruptcy provides relief for individuals and entities unable to manage debt. Benefits include mitigating debt pressure and stopping creditors from harassing you.
Processes like Chapter 7 Bankruptcy are done through the federal courts. This can be a hefty expense and investment of time as bankruptcy involves lawyers, court appearances, paperwork, investigations, etc. It will also hurt creditworthiness which can last for years. With all that in mind, bankruptcy should not be chosen lightly.
Choosing Between the Two Debt Strategies
Here is a look at both bankruptcy and debt consolidation and how they work.
Bankruptcy is a complex legal process. Through bankruptcy, you eliminate debt but expect it to have a long-term impact on your creditworthiness. Bankruptcy is a matter of public record that anyone has access to. Thus, the stigma of filing can stick to your reputation for up to 10 years. That means lenders and creditors will be averse to working with you. Even if you find a creditor or lender, your options may include high-interest-rate instruments.
We wouldn't advise anyone without a legal background to go into federal bankruptcy court solo. There are too many ever-evolving regulations and rules governing the proceedings that can ripple and flip the odds against you.
One thing to remember about a process like Chapter 13 Bankruptcy is the court lets you use the solution to protect yourself personally but that does not necessarily mean you wipe out debt. For instance, a co-signer on your discharged loan might still be responsible for the debt. That leaves family, friends, and other co-signers vulnerable to collection.
Bankruptcy can discharge the following debts.
- Auto loans
- Credit cards
- Medical and utility bills
- Personal loans
Under the law, the following debts cannot be forgiven via bankruptcy.
- Child support
- Student loans
- Tax debt
If you're looking to refinance debt, you can apply for a debt consolidation loan.
Your credit score will play a part in getting a consolidation loan. You might think being in debt (and possibly having poor credit) could be an obstacle to getting a consolidation loan. But these instruments are specifically designed to help consumers in just those circumstances. But it will be up to you to perform proper due diligence to find a lender that can support your agenda and protect you financially. You definitely want to keep an eye out for lenders that promise the world. They eagerly take advantage of the desperate, offering high-end loans that only look promising.
If you are contemplating debt consolidation versus bankruptcy, the former is a solid option if you're simply looking to better manage your monthly payouts with lower rates and lower payments. If your finances are already well into collections and you're probably ineligible for a loan, bankruptcy may be the way to go.
The Law Offices of James C. Shields is here to help people who cannot pay their debts. Reach out today to learn more about how a fresh financial start is possible for anyone.