Debt consolidation or bankruptcy can leave you in a dilemma when you have to make your pick out of the two. A wrong choice can not only plunge you deeper in debts but also hurt your credit report big-time. The tangle can be resolved by gaining an insight into what these programs offer and which suits you the best.
Debt consolidation vs. bankruptcy – How do they work?
Debt consolidation is a process that allows you to bundle up your debts into one, and pay them off by taking up a single consolidated loan. Credit counseling agencies offer professional counselors that take up negotiations with your creditors, who may agree to thin down on vital parameters of your debts’ interest rate, late fees, other charges etc.
Once the negotiations are settled with each of your creditors, you assign a calculated monthly payment to the credit counseling agency, which then breaks it down into requisite amounts and pays your creditors.
Bankruptcy is a different ball game altogether and should generally be considered as a last resort to clear away debts. By declaring bankruptcy, you proclaim your inability to pay off debts and are legally absolved of your debts and dues. To be considered for bankruptcy though, you need to meet certain criterion as listed in the US Bankruptcy code.
Bankruptcy cases either fall under Chapter 7 or 13 of the Bankruptcy code. If you are granted bankruptcy under chapter 7, all the pending debts are done away with and you may be allowed to hold on to your home and a minimum of one vehicle, if you wish to. A bankruptcy granted under chapter 13 does not relieve you off the debts on the whole. You need to repay the debts at reduced rates and in a way allows you some freedom in repaying the debts.
It is best to rope in a finance attorney for setting up bankruptcy claims. Bankruptcy laws are complex enough to sink in and require legal as well as financial precision. Once an attorney scrapes the bottom of your situation, he/she will apprise you of the best available options and shall proceed with filing for bankruptcy under the applicable clauses.
Your eligibility for chapter 7 or 13 bankruptcy depends on a lot of factors as listed in chapter 11 of the code. As an overview though, chapter 7 bankruptcy is allowed to debtors who are in grave circumstances and have virtually no chance of repaying back the debts.
Debt consolidation vs. bankruptcy – Pros and cons
Debt consolidation saves you from making multiple payments every month for each of your debts. Instead, you make good a single consolidated payment per month to the credit counseling agency. Another advantage of consolidating your debts is that you pay at subsidized rates and charges. So, if you make the payments on time, you may end up saving some money on your debts.
On the adversity scale, debt consolidation has marginal effect on your credit report and the information about your financial status is kept confidential. Debt consolidation is a relatively low-cost affair with some credit counseling agencies working on non-profit basis.
As for the disadvantages, debt consolidation applies to unsecured debts only. Besides this, consolidation loans are secured loans and require collateral. Opting for such loans converts your unsecured debts into secured ones. There are chances that you may not be able to procure any credits or loans while going through a debt consolidation program.
Bankruptcy on the hand offers almost a complete whitewash of your debts, or in some cases the debts are highly reduced. Bankruptcy relieves you of all the debts that fall within its purview, provided you meet the laid down standards and criterions.
The biggest drawback of bankruptcy is that it hits your credit report hard and reflects negatively on your report for up to 10 years. This makes securing any credits, loans really difficult, and in case you somehow manage to find one, you will be charged exceptionally high rates.
Besides, bankruptcy can turn out be a costly affair. Apart from attorney’s fees, the costs of court proceedings are also borne by the debtor. Bankruptcy, unlike debt consolidation is made public knowledge. Certain debts as alimony, child support and taxes may not be covered for and you may still need to pay them.
Debt consolidation or bankruptcy shall work well only if chosen in accordance with the circumstances. Both options provide you with a chance to start afresh, but are pricey in their own ways.