Debt Consolidation vs. Bankruptcy: Which is Better?

The gradual phasing out of the moratorium and financial protection measures the federal government took during the pandemic alerts about the pain that most debtors will experience by the end of 2021. In a while, they will rethink methods of discharging debts.

Therefore, it is useful to engage in understanding which is better: debt consolidation or bankruptcy. Questioning helps us know whether the light at the end of the path we choose is real or mirage.

What is Debt Consolidation?

To put it simply, debt consolidation is a legal process of consolidating or replacing all your debts with a new united one. Banks and credit unions are available to offer consolidated debts. This may be the right option if the new loan is offered at a better rate and extended over a more feasible period that helps retaining cash flow.

Is Debt Consolidation Beneficial?

• Through this process you end up paying all your debt to one side. However, that does not harm your credit score as much as late payments or bankruptcy do.
• When consolidating debts, you will have less chances to forget managing any debt of yours. There is only one debt to keep track of.
• Expect improvement of credit records due to less chances of delaying or forgetting repayment.
• But careful! Having a stretched time for payment may implement additional costs in the long run.
• Moreover, individuals consolidating their debts do not close the credit card accounts they removed their debt from. These credit cards with enhanced balance become too tempting to use. People may use a personal loan or get a loan online in addition to the consolidated ones. Therefore, extra caution is required when in debt consolidation status.
• Debtors need to remember that debt consolidation remark will remain in their credit report for a period of seven years. However, that could be removed if they know how to ask. Sometimes companies make laws to break them under certain conditions. Creditors will remove the remark affecting the credit history if previously agreed with the debtor or the latter had paid for it to be removed. A financial assistant or an attorney may be of assistance in this regard.

What is Bankruptcy?

Bankruptcy is a legal process that individuals and businesses follow to overcome outstanding debts. At the end of the process, the debtor expects to receive a discharge order from the federal court. The actual process begins by filing a petition in bankruptcy court based on the debtor’s liquefiable assets. Therefore, while bankruptcy is a method of receiving forgiveness from debts and saving the remaining finances, it is also the creditor’s opportunity to get a portion of the repayment through the liquified assets of the debtor. Of course, the debtor’s eligibility for filing bankruptcy and assets available for liquidation are evaluated before processing the petition further.  

Is Filing Bankruptcy a Good Idea?

Even if you believe that your debts are beyond your personal capabilities, you should weigh all the pros and cons of declaring bankruptcy. 

• The moment you file bankruptcy, creditors stop calling you for your debts. They will not have the right to garnish your income or sue you.
• When the bankruptcy is approved, your debts will be discharged.
• Moreover, creditors will record a balance of zero on your credit card. 

You feel complete relief for a while. That, however, will not necessarily last long. Filing bankruptcy is not a permanent solution.

• It lowers your credit score and influences the credit report for a period between seven to ten years. Therefore, you will need to figure out how to rebuild your credit score.
• New loans would be difficult to obtain unless with high interest rates.
• Your credit cards may get closed. That is because you do not have the right to select the creditors while filing bankruptcy.

In other words, by filing bankruptcy, you may be closing your own fortune doors.

There are other facts to consider too.

• Student loans, taxes, and child support are not discharged in bankruptcy. Though easier than the bigger load, they will remain debts for you to take care of.
• The most common types of filing used in the US are the Chapter 7 and Chapter 13 bankruptcies. The first cleans your debts in a matter of six months. However, personal properties, such as your home and vehicle, will be at risk, especially if they were used as loan collateral. Chapter 13 is based on your income. It allows you to pay as much as possible from your debts for a period from three to five months. After, the court will order discharge from remaining debts.  
• Filing bankruptcy implicates costs. While filing fees are fixed, attorney fees vary based on the location, attorney, and case complexity. A web search indicates that the total cost for Chapter 7 varies between $1500 and $3000 while the total cost for Chapter 13 is between $ 3000 and $4000.
• Before filing bankruptcy, and within 180 days period, debtors should have received credit counseling/financial management course from an agency approved by the US Trustee’s Office. This also implements costs that vary between $20 and $100.
• If a creditor or someone files an adversary proceeding in your case, the bill for an adversary proceeding may well be more than $10,000.

These are all matters to consider apart from emotional trauma. Debtor who files bankruptcy may feel failure. It is not easy to reveal your financial life to the court or let others know about your bankruptcy.

Bankruptcy vs Debt Consolidation

Is it better to file bankruptcy or consolidate debt?

Have a shot across the bows. Always consider means to enlarge your pie rather than limiting it. Never ever think that the future is harder than your present. In fact, when businesses and governments think of new ways for enlarging their own pie, you can also think of means for improving your financial status.

Creditors look for customers. Therefore, if you share your problems with them, they may suggest methods to rescue you and your business. They may consolidate your debt in the best rate possible saving you from the hassle and negative effects of filing bankruptcy. You should also take the lead of improving your own status. Rather than surrendering, ways of gaining money, making a profit, and rebuilding credit should be your priority. You may also speak to a lawyer or financial advisor before taking any action. Based on your circumstances, they can advise if you should file for bankruptcy, or consolidate your debts. They might suggest having a small personal loan for business which can help you alter the situation fully. Eventually, the light at the end of the tunnel should be a genuine one.