By David Pilley on March 21, 2011
.jpg.aspx) Debt consolidation or bankruptcy; which is the better solution to your debt problems? Personally, I would go with debt consolidation because of less detriment to my credit score, but different things suit different people. There may come a time where these are your two best options, and you should have all things considered before deciding which is the right choice for your situation.
A big factor in the decision is your income. If you are making enough income to set aside a portion for debt repayment, you might want to choose consolidation. If you are insolvent, meaning your monthly income is less than what you’re spending on house payments, utilities, food, and other vitals, then bankruptcy could be the best way to alleviate your debt problems.
The amount of debt you have is also important. Remember that if you’re trying to get a debt consolidation, companies look for outstanding balances higher than $7,500. If your total amount of debt is less than that number, then you really don’t need to look at either option
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Fees are always something to look at when money is involved. Consolidating your debts and filing for bankruptcy both involve fees, possibly hundreds of dollars to start up either one. Bankruptcy might involve more fees, however, if you hired an attorney during the process. Debt consolidation may be the better choice if you don’t want the possibility of hefty processing fees.
There are some types of debts that neither debt consolidation nor bankruptcy can get you out of paying. Debt consolidation deals with unsecured debt, most notably your credit card debt. It can’t get you lower car payments or monthly mortgage payments. On the other hand, bankruptcy will not get you out of paying your taxes, student loans, or child support.
One good thing about bankruptcy is that it will protect you from possible lawsuits. Once you declare bankruptcy, your creditors can no longer pursue the debt collection (if the debt is included in the bankruptcy proceedings). Even if you have consolidated your personal debts, a creditor could file a lawsuit against you, especially if you make late payments on the consolidated plan.
If you would like a little privacy, debt consolidation might be better. Bankruptcy is public record, and anyone can access the information. There can be some stigma involved with being bankrupt, so if you don’t like everyone knowing your business, stay away from bankruptcy.
The final thing to consider is your credit score. Both consolidation and bankruptcy will lower your score, that’s a given. While you’re paying off your consolidated loan, you cannot use any of your credit cards, and you cannot gain any new lines of credit. The debt consolidation will stay on your credit report for a few years, and it may be difficult to obtain new credit immediately after paying off the debt. Bankruptcy, on the other hand, stays on your report for ten years. It may take several years after your bankruptcy to be approved for a new loan with a low interest rate. And, you can’t file for bankruptcy again for a few years, depending on under which chapter you filed and/or are going to file. With any decision, there are pros and cons. Consider these things before thinking about either debt consolidation or bankruptcy.
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