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Debt Consolidation or Bankruptcy: Which is Better?

By Brenner Spiller & Archer, LLP | March 20th, 2018

Debt is a frustrating beast. No one enjoys debt and losing control of it only adds to the mental (and monetary) stress. The good news is that there are two popular options to help manage overbearing repayments: debt consolidation and bankruptcy. Here’s how to tell which one will best help your situation.

What is Debt Consolidation?

When someone runs into money troubles, it often means they have several loans and bills to repay to different banks and companies, but may not have the money to fully pay them back on time.

Debt consolidation is one option for repaying these creditors. In debt consolidation, all loans and bills are lumped into one single repayment plan instead of several separate repayments.

This makes repayment easier to manage, as well as offering lower monthly payments and lower interest rates.

What is Bankruptcy?

A bankruptcy filing is another way to manage or dismiss bills and loans that are difficult to repay. Most people are offered two types of bankruptcy: Chapter 7 and Chapter 13.

In Chapter 7 bankruptcy, the person filing will have almost every one (if not all) of their debts wiped clean and will not need to repay any of them. When someone files for Chapter 13 bankruptcy, the borrower pays back at least parts of his or her debts.

The Differences Between Debt Consolidation and Bankruptcy

Mental Strain

Debt consolidation, though reduces stress by offering one repayment each month, still leaves a constant reminder of your debts until all payments have been made. Bankruptcy can eliminate your worries with a clean slate (Chapter 7) or fewer repayments (Chapter 13).

Credit Score

Debt consolidation won’t affect your credit score, meaning if you have a low score, it will stay low. Bankruptcy, while initially lowering your credit score, can eventually increase it.

Privacy

Debt consolidation is entirely private, so friends, family and coworkers never have to know. Bankruptcy may cause your employer to find out (if your Chapter 13 plan pulls repayments from your paychecks). Bankruptcies are also publicly available, so if someone searches hard enough, they can find out.

Obtaining Credit

Debt consolidation may allow you to keep credit cards, though more purchases using credit only adds to your debt. Bankruptcy can inhibit you from obtaining credit for three to five years.

Creditor Interaction

Debt consolidation doesn’t block creditors and lenders from contacting you, asking for more or faster repayments. Bankruptcy (and an automatic stay) prohibits creditors from contacting you or shutting off utilities and repossessing vehicles.

Collateral

Debt consolidation doesn’t guarantee that lenders can’t take your home or car if you list it as collateral. Bankruptcy will prohibit lenders from collecting your house or vehicle.

Which is best for you?

Though this gives you a quick snapshot of debt consolidation and bankruptcy, to really get an idea of which is best for you, you should sit down with a lawyer and go the details of your situation. Give us a call today to learn which path you should take.



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