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Debt Consolidation vs Bankruptcy: What's the Difference?

Are you in debt and wondering whether to consolidate your loans or file for bankruptcy? Well, here is a guide to help you make the right choice.

When debating between selecting debt consolidation vs bankruptcy, it’s imperative that you understand what each option involves. You need to know the benefits and consequences of each option; and their long-term effects.

What Does Debt Consolidation Entail?

Debt consolidation is a way of re-organizing and paying off debt. As its name suggests, the practice involves combining several debts into one larger debt so that it’s more manageable.

In most cases, people apply for a loan large enough to cover their debts and use the money to pay off their other smaller, unsecured loans. The main goals of debt consolidation are to simplify the debt repayment process and significantly reduce a debtor’s monthly payments and interest rates.

Here is an excellent example of how debt consolidation works. Assume you have a total debt of $15,000 but from five different credit cards. You owe a small amount on each card, say $3,000, and the interest rates on these cards are anywhere between 15 and 20 percent.

If you have a good credit score and take out a single loan of $15,000 at an interest rate of 12 percent, you’ll save a substantial amount of money on interest while lowering your monthly payments.

What Does Bankruptcy Entail?

Bankruptcy is often more complicated than debt consolidation. It’s a legal process through which an individual or organization files a petition in court requesting their debts to be discharged due to unemployment, divorce, or illness. There are two main types of bankruptcy, known as Chapter 7 and Chapter 13.

Chapter 7 bankruptcy is commonly referred to as liquidation bankruptcy. A trustee (a third party to the case) is hired to sell or liquidate your non-exempt assets to pay off your debts. You get to retain your exempt properties (i.e. home, auto, retirement accounts, life insurance, and business assets.)

In Chapter 13 bankruptcy, all parties to the case (mainly you, your attorney, and your creditors) negotiate a repayment plan so that you can settle some of your debts gradually.

Filing for bankruptcy discharges many debts, including credit card debt and medical bills. With this option, you are not required to repay your unsecured debt.

Pros and Cons of Debt Consolidation vs Bankruptcy

Debt consolidation may not damage your credit score as much as a bankruptcy, and it offers significant savings on interest fees. It’s not as complicated as filing for bankruptcy and may be a better option if you’re able to meet your minimum monthly payments.

However, if your credit is already too damaged and your FICO score is too low, you may not even qualify for a debt consolidation loan. Additionally, if you take out a secured loan using an asset like your house as collateral, and you fall behind on payments, you risk losing your home.

Filing for bankruptcy negatively affects your credit score for a period of time. On the bright side, if your credit score was already low it can’t get much worse. If you can’t afford to make payments on a debt consolidation loan and your credit is already bad, bankruptcy might be the best option for you.

One of the main reasons why many people choose bankruptcy is that it releases you from having to repay debt that you can’t afford to pay. It also protects you from creditors who would want to make a collection against your assets. It allows you to clear your obligations and start building your credit from scratch.

Debt Consolidation or Bankruptcy?

Deciding which option is best for you depends on many variables. A reputable attorney can offer you advice based on your specific circumstances.

Call the Law Office of Marilyn D. Garner TODAY at 817.381.9292 for a free consultation to discuss whether debt consolidation of bankruptcy is right for you!

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