If you have a lot of consumer debt that seems impossible to manage on its own, you are probably looking for the best possible way to deal with it. For many people, managing their debt comes down to deciding to consolidate it through a loan or discharge it through bankruptcy.
The option that will work best for you will depend upon your unique financial situation. You should also only make your decision after consulting with qualified professionals who have a lot of experience providing these services. Use the information below to familiarize yourself with some general pros and cons that bankruptcy and debt consolidation each offer.
What Is Debt Consolidation?
Debt consolidation is a lot of what it sounds like. When you consolidate your debt, you are reorganizing multiple debts into a single payment. Debts can be consolidated with either a secured or unsecured loan, and your credit is usually protected.
Why People Choose Debt Consolidation
There are several important advantages to consolidating your debt under a new loan, such as the following:
- Your credit score is protected: Unlike bankruptcy, consolidating debt isn’t a matter of public record. This means that if you need to protect your reputation to keep a job or acquire new credit, consolidating your existing debt is the way to go. Also, while consolidating debt shows up on a credit report, you can expect it to have only a minor impact on your credit score, if any at all.
- You can continue to access credit: In most debt consolidation agreements, borrowers are allowed to keep their existing credit cards and apply for new credit. This may only be the case if you previously owed a moderate amount of debt and hadn’t defaulted.
- Low interest rate and monthly payment: Consolidating your debt can provide much more manageable monthly payments at a lower interest rate. This can make it easier to pay off your consolidated loan and one day be free of debt altogether.
Why People Avoid Debt Consolidation
Despite the advantages of consolidating debt, it can also come with significant disadvantages:
- You may lose valuable collateral: If you default on a consolidated loan secured by collateral, you can lose whatever you attached to the loan. That can be your car, home, or other valuable pieces of property.
- There may be a hidden cost: Your lower monthly payment and interest rate are certainly appealing, but multiply that cost for each month throughout your loan’s term. Does it come out to a lot more than the debt you currently owe? For many people, it is – and that’s the hidden cost of a consolidated loan. Although you’re paying less per month, your loan could total to well beyond the value of your original debt by virtue of its term.
What Is Bankruptcy?
Bankruptcy is the legal process of discharging and/or restructuring debt. The most common bankruptcy filings occur under Chapter 7, which allows debt to be eliminated, and Chapter 13, which allows debt to be restructured.
Why People Choose Bankruptcy
Bankruptcy is often a great way for individuals and business owners to deal with their debt problems, offering them benefits such as:
- Protection from creditors: Filing for bankruptcy puts an automatic stay on all collection actions your creditors can take against you. It can also stop collections that are already underway. For example, if you’re in the midst of foreclosure, the automatic stay stops it dead in its tracks. If your wages are being garnished, the garnishment ceases. You are also protected against harassing phone calls and repossession attempts for as long as it takes your bankruptcy case to settle.
- Bankruptcy can offer a new beginning: Chapter 7 bankruptcy lets filers eject most of their unsecured debts, such as those from credit cards, medical bills, and more. If you got underwater because of real estate or vehicles you owned, you can also return these to free yourself from their financial burdens.
Why People Avoid Bankruptcy
Ultimately, people tend to avoid filing for bankruptcy for the following reasons:
- Your credit will be damaged: Bankruptcy will damage your credit score and show up on your credit report for up to seven years. This can make life difficult if you need to acquire new credit, apply for a place to live, or even apply for jobs that require applicants with good credit ratings. That said, if you have good credit, bankruptcy might not hurt as bad as you’d expect. If your score is already low, however, bankruptcy can be a lot more painful.
- Sacrifices must be made: When it comes to bankruptcy, you will have to make such tough choices. Because Chapter 7 is a liquidation bankruptcy, you may have to forfeit luxury goods that you can’t exempt. Filing for Chapter 13 will also put you on a tight budget for three to five years, during which you won’t be able to get new credit without the court’s consent.
Need Help Making the Right Choice for You?
If you are unsure about whether you should apply for a consolidated loan or file for bankruptcy, our attorney at Nguyen Law Group can help. During an initial consultation, you can tell us about your financial situation and learn more about the ways in which we can help.
We understand that people are often wary about filing for bankruptcy. If we believe this option can help you manage your debt, however, you can rest assured knowing we’ll have your back through each step of this process. By reaching out to us for help, you can be taking your first step toward becoming debt-free!