How Is Debt Consolidation a Better Choice Than Bankruptcy?
When you are facing a financial crisis, it can be very overwhelming and you can feel as if your world is spiraling out of control. Take some comfort in knowing that you are not alone and that you can overcome this trouble. A good credit counselor from a licensed agency can help you pick your best line of action, such as deciding whether you should go through debt consolidation or a bankruptcy. If you can consolidate your debt, that is usually the better choice.
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About Debt Consolidation
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With debt consolidation, you lump all of your bills together into one. The idea is to be manage your debt by having only one payment with one interest rate. Typically, with debt consolidation, you will be paying less per month on bills, but you will be extending the length of time it will take to pay off your debt, so in the long run you will pay more in interest, according to Utah State University.
Home Equity Loan
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One way to consolidate your debt is by taking out a loan based on your equity in your home. If you are able to do this, it is very important not to miss any home equity payments, because your home is on the line.
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Debt Consolidation Firms
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Other consolidation options are debt management or debt settlement through a consolidation company. The company negotiates with your creditors to secure a better interest rate for you. Your monthly payment goes to the consolidation company, which pays your creditors.
You cannot take on any more debt while you are working with a consolidation company. Sometimes the consolidation company can negotiate a settlement with your creditors, striking a deal whereby you have to pay back only part of what you owe, such as 50 percent or 75 percent. For your creditors to agree to this, you usually need to give them a lump sum to settle your debt.
About Bankruptcy
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You want to consider bankruptcy only as a last resort, according to the U.S. Federal Trade Commission. With a bankruptcy, you will not have to pay off most debts you have, but this information will stay on your credit report for 10 years, meaning that you will not be able to get any credit, buy a home, get life insurance, or even take some jobs, for the next 10 years.
Types of Bankruptcy
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You can file for Chapter 13 or Chapter 7 bankruptcy. Under Chapter 13, you can keep your property as long as you have a steady income and as long as there are no liens or unpaid mortgages on the property. You will have a court-approved repayment plan by which you can pay off your debts during three to five years.
Chapter 7 is a straight bankruptcy in which you lose all of your assets. Even with a bankruptcy, you would still be liable for child support, alimony, student loans and taxes.
Use a Reputable Credit Agency
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When you file bankruptcy, you must get credit counseling from a government-approved organization. With debt consolidation, you are free to choose any consolidation company you like.
Understand that there are many disreputable firms that would put you in an even worse spot than you were in before. Go through the National Foundation for Credit Counseling to find an honest company.
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References
- Photo Credit Debt concept - cutting a credit card image by Sophia Winters from Fotolia.com
