Debt Consolidation Versus Bankruptcy: Which One Will You Choose?

If you feel like you are drowning in personal debt, you are not alone. By late 2018, Americans owed more than $420 billion in credit card debt alone. Many get help through debt consolidation or bankruptcy. If you are considering either option, it is essential to understand how they work. Both have benefits and risks, so it is wise to weigh all factors before making a choice. At a minimum, you should understand the differences between the two and the qualifications for each.

How a Bankruptcy Works

Bankruptcy is a federal protection that is designed to help those who cannot repay debts. It will eliminate consumer debt and, in some cases, allow you to repay debts using payment plans. Debtors may be eligible for either chapter 7 or chapter 13 bankruptcy. Chapter 7 is known as liquidation bankruptcy and may require individuals to sell belongings to pay debts. Chapter 13 filings are known as repayment bankruptcies and include payment plans typically lasting 3-5 years. All bankruptcies must be administered by legal experts who can guide their clients’ choices. For example, when individuals call John A. Steinberger & Associates, professionals offer detailed information about all debt relief options.

How Debt Consolidation Works

Basically, debt consolidation is the process of rolling several debts into a single new one. It is an option that has become well known in recent years as consumer debt has escalated. In fact, a recent article reported that the average U.S. citizen has approximately $38,000 in personal debt. That level of debt can make it difficult to pay even the minimum amount due. Debt consolidation often helps because it can result in one payment that may be lower than the total of current payments. The interest might also be lower. You can consolidate using a personal loan, credit card balance transfers, a home equity line of credit, or a home equity loan.

You May Qualify for One or Both Options

The choice between debt consolidation and bankruptcy may also boil down to your qualifications. Some applicants do not qualify for debt consolidation because it requires a minimum credit score of 600, a debt ratio of 40% or less, and no recent bankruptcies. However, many of them to meet the standards for bankruptcy. That is one reason the United States Courts website reports that 12.8 million personal bankruptcy petitions were filed between 2005 and 2017. To qualify for chapter 7 bankruptcy, you must complete credit counseling and meet income requirements. A chapter 13 bankruptcy also requires credit counseling and applicants cannot exceed secured and unsecured debt caps.

Each Choice Has Pros and Cons

Bankruptcy and debt consolidation each has benefits and risks. Debt consolidation can raise your credit score when you pay off a large amount of debt. Credit bureaus either drop debts off your credit report or designate them as laid down. However, the time it takes to pay off debt is often extended. There is also the danger of incurring new debt if you begin using your credit again. A bankruptcy lowers your credit score but does not prevent it from rising over time. Depending on the type of filing, a bankruptcy drops off your credit report entirely within 7-10 years. In addition, chapter 7 bankruptcy can eliminate debt within 6 months and chapter 13 repayment plans are no longer than 5 years.

Bankruptcy and debt consolidation are two options that can help if you cannot pay overwhelming amounts of debt. Each has requirements that may determine which is available to you. Bankruptcies are administered by legal professionals, while individuals can arrange debt consolidation through lenders. Debt consolidation has a more positive impact on credit but extends the life of debt. Bankruptcy has a temporary negative impact on credit but offers faster debt relief.

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