If your back is pressed against the wall due to overwhelming debt, you may find yourself wondering if you should pursue debt consolidation or bankruptcy to bring some relief and help you begin again.
Consumers are Dealing With a Lot of Debt
We don’t need to review the statistics. We’ve already discussed them here and here. Everyone is feeling the pinch. Student loans, credit card debt, unexpected financial events—all of this can pile up and leave you drowning in a financial riptide. The situation is worse if your bills have been sent to collections. You just need some breathing room, to collect yourself and get back on track. What is the right thing to do? Take a debt consolidation loan and slowly pay back your debt? Or are you so far into the deep end that your only choice is bankruptcy?
Before making a decision, it is important to understand how debt consolidation or bankruptcy work and how each one impacts your life going forward.
Pros and Cons of Debt Consolidation or Bankruptcy
Debt consolidation is a strategy to help you get a handle on your various debt accounts. The chief way to do this is with a debt consolidation loan.
A debt consolidation loan, such as a P2P debt consolidation loan, brings together all of your debt into one single loan. The loan is repaid through automatic withdrawals from your bank account. By combining all of your debt into a single debt consolidation loan, you can come away with a better interest rate on the overall debt, make your payments on time, and repair your credit score.
There is another option: to work with a credit counseling agency. This choice requires you to make a monthly payment to the credit counseling agency, and they pay your debts for you. Use caution when choosing this option. Be sure to investigate the business practices of the credit counseling agency with the FTC or local government authorities. Usually, you are also required to attend credit counseling classes to help you avoid future debt.
If you are thinking about debt consolidation or bankruptcy, keep in mind that debt consolidation helps you get out of debt with the least amount of pain. Unlike bankruptcy, which we will discuss next, your assets are not at risk. It is a lot easier to do. For instance, from Peerform, all you have to do is go online and fill out the application. No court fees and no lawyers. A debt consolidation loan will ultimately improve your credit score, and it gives you the satisfaction of taking responsibility for your debt.
But there are times when the flood of debt is so overwhelming that you have no other choice but to pursue bankruptcy. Medical debt can be one of those financial crises that forces you to consider bankruptcy. Bankruptcy allows you to restructure your debt, or to eliminate it, depending on which Chapter of bankruptcy you pursue. Unlike debt consolidation, bankruptcy goes through the courts. The paperwork is cumbersome and requires legal assistance. In addition to the lawyer, you must pay court fees. But in some cases, bankruptcy may be the only answer.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy eliminates your debt. Basically, your slate is wiped clean and you begin anew. However, this action will remain on your credit report for ten years. And, it can take several months to complete the process. It is not easy to obtain. The court will look at the totality of your financial situation and, depending on your income, you may not qualify. This is why a lawyer is so important. If you have property, the court will seize it to raise some funds to pay at least a little to your creditors. Tax debt or student loan debt cannot be discharged through a Chapter 7 filing. Hopefully, if you decide to file for Chapter 7 bankruptcy you will get yourself back on track. But, if not, you have to wait 8 years before you can file again.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy restructures your debt and sets up a repayment plan. The court prioritizes your debt, giving priority to any secured loans that you may have, such as automobile or mortgage. Next on the list is unsecured debt, such as your credit cards, student loans, and so forth. The court determines how much of your income is remaining after you pay the secured debt and establishes a percentage of this that must go toward paying off your unsecured debt. You pay this amount to the court-appointed Trustee. As with the Chapter 7, you must meet income requirements, it is a court procedure, it takes time and you need a lawyer. Also, a Chapter 13 filing will remain on your credit report for 7 years.
So, which is right for you—debt consolidation or bankruptcy?
It depends. It is a serious decision and you should reach out for advice or at least someone to help you brainstorm. If you feel that you can handle the finances yourself, but you just need a lifeboat, debt consolidation would be the better choice. Take a serious look at your budget—your income and expenses. Identify areas where you can minimize your out-of-pocket expenses. Remember, a debt consolidation loan is repaid through automatic deduction from your bank account. Be sure that you will have the money in your account to cover this. If you feel prepared to exercise more discipline in your fiscal life, a debt consolidation loan can be very empowering, setting you free to move forward with your life goals.
On the other hand, if your debt is considerable, such as credit card debt that would take years to pay off, or medical bills that far exceed your capacity to pay now or in the future, then bankruptcy may be the right choice. Chapter 13 is the less painful bankruptcy, it remains on your credit report for less time and you gain some sense of at least making the effort to repay your creditors. But, in both types of filings, your credit score will suffer.