Credit Consolidation Vs. Bankruptcy
A consumer facing financial hardship may consider consolidating debt or filing for bankruptcy. Debt can be consolidated by obtaining a debt consolidation loan, a home equity loan, or by transferring high interest debt to a low interest credit card. Bankruptcy is also an option. A Chapter 13 places the debtor's debt in a repayment plan, while a Chapter 7 discharges the debt.
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Consolidating Debt
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A debtor may consolidate debt into a debt consolidation loan. A debt consolidation loan joins separate debts into one debt. A debtor will still owe the same amount, but it is only necessary to make one monthly payment. Many debt consolidation loans have lower interest rates than credit cards and offer lower monthly payments.
Paying Debt with an Equity Line
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A debtor with equity in his home may choose to consolidate debt with a home loan. The advantage of using a home equity loan to pay off debt is its low interest rate. Typically, it has a lower interest rate than credit cards and consumer loans. Additionally, the interest the debtor pays on the loan may be tax-deductible. However, the borrower should be aware that defaulting on an equity loan raises the risk of losing the property to the lender through repossession.
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Transferring Debt to a Low Interest Credit Card
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Borrowers with debt on high interest credit cards may take advantage of low credit card transfer rates. Some offers promise zero percent or a low interest rate until the transferred amount is a paid in full or until a specified time. Transferring the debt to a lower interest may result in the payment of less interest over time.
Paying Creditors in a Chapter 13 Repayment Plan
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A debtor with an uncontrollable amount of debt may file for Chapter 13 bankruptcy. Chapter 13 is a reorganization bankruptcy that still requires the debtor to pay off creditors in a court approved repayment plan. The repayment plan places priority debt and secured creditors at the top of the list. These creditors are paid in full. Unsecured creditors, such as credit card companies, are typically paid a portion of the amount owed.
Discharging Debt in Chapter 7 Bankruptcy
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A debtor may also seek a more permanent solution for getting out of debt. Chapter 7 bankruptcy is available to debtors that are able to meet the criteria. A debtor must qualify by passing the means test. The mean test determines eligibility by comparing the debtor's income with the median income in the state where the debtor resides. If the debtor income is less than the median, Chapter 7 may be an available option. A Chapter 7 bankruptcy allows the debtor to discharge all debt with a few exceptions: the discharge of tax debt and student loans is only available if the debtor qualifies.
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