Bankruptcy VS Debt Consolidation - Which One Is Right For You

Bankruptcy & debt consolidation can both remove your debt. But each will have different effects on your credit score & future financial choices. Before choosing between bankruptcy & debt consolidation, educate yourself on the advantages & disadvantages of each.

The Advantages Of Bankruptcy

Filing bankruptcy will grant you immediate but only temporary relief with the automatic stay. Debt collection by creditors are no longer allowed. Annoying phone calls, repossessions, & mortgage foreclosures are all stopped temporarily. The main goal of bankruptcy is the discharge of most, if not all of your debts. The discharge wipes out plenty of types of unsecured debt like credit card & medical debts. you are legally debt free three time you get the discharge & you can have a financial fresh start.

If discharge through a Chapter 7 bankruptcy is not possible, then a repayment plan through Chapter 13 is your next alternative. A bankruptcy repayment plan will permit a debtor to payoff debts over a three- or five-year period. A Chapter 13 bankruptcy repayment plan is like a debt consolidation program with more restrictions.

The biggest disadvantage of bankruptcy is the immediate impact on your credit score. You cannot remove bankruptcy from your credit report for 7-10 years. While you can improve your credit score after your discharge, for a few years you will have to work with sub prime lenders. This means higher interest rates on your future loans or credit cards.

The Negative Effects Of Bankruptcy

On a Chapter 7 bankruptcy, a trustee will liquidate your assets & divide it equally to all your creditors. Under a Chapter 13 repayment plan, payments may be deducted from your paycheck for up to two years. You will need to turn-over your disposable income to repay your creditors.

Since bankruptcy is a federal court case, you need to give detailed financial records to the court & creditors. Your financial affairs will become open to the public.

The Advantages Of Debt Consolidation

You cannot use bankruptcy again for the next two years after the discharge of your debts.

Debt consolidation saves an individual from handling large debts from multiple creditors. It combines all your debts in to a single debt management program. Debt consolidation lowers the interest rate & waives off the late fees on your loans. It also removes the accrued interest & penalties on your loan. Every month you pay only the consolidation company instead of plenty of creditors with different due dates. The consolidation company will manage paying off all your creditors for you. This will lessen the occurrence of late payments on your loans.

Similar to bankruptcy, you can avoid harassing collection calls from debt collectors. The consolidation company will handle & negotiate with your creditors on your behalf. The company is now representing you & all future collections will go through them. After paying all the accounts in full, the company will also negotiate to get your accounts reported in your favor.

Debt consolidation will have less of an impact on your credit score. Until you fully pay your accounts, a remark saying that you are paying by credit-counseling agency will appear on your credit report. Getting & qualifying for a new credit will become difficult at start.

The Negative Effects Of Debt Consolidation

Choosing Between Bankruptcy & Debt Consolidation

there is no elementary solution to getting yourself out of debt. A Chapter 7 bankruptcy can instantly give you debt relief but at the cost of your assets & credit score. Debt consolidation is simpler with maximum effect on your credit, however it does take time.