Bankruptcy vs. Debt Consolidation: Which One Is Right for Me?

Bankruptcy vs. Debt Consolidation: Which One Is Right for Me?

Unfortunately, there are plenty of ways to find yourself in over your head with debt. Unexpected car repairs, large medical bills, or losing your job can quickly affect your financial well-being.

Even if you have a large amount of debt, you still have options for reducing it. Bankruptcy and debt consolidation can both be effective debt relief options to help you significantly reduce your debt or potentially get rid of debt altogether. Learn more about how bankruptcy and consolidation work and whether or not one of these methods is the right debt relief option for you.

What Are Bankruptcy and Debt Consolidation?

Almost all debt relief options, including bankruptcy and consolidation, are designed with the goals of reducing debt and/or making it easier to manage. That said, the methods used for managing debt through bankruptcy or debt consolidation are considerably different. Before you can decide if bankruptcy or consolidation is right for you, you’ll need to understand how each method works.

Bankruptcy

While most people are familiar with the term, not everyone understands how bankruptcy works. Bankruptcy is a legal process overseen by a United States bankruptcy judge that provides protection to people who cannot pay back their debts.

Through the bankruptcy process, you may be eligible to have some of your debts completely eliminated.  Not all debts can be discharged, such as most alimony, student loans, or criminal fines. In addition, bankruptcy can potentially stay on your credit history for 7-10 years. Therefore, bankruptcy is often seen as a last resort and only if you’re absolutely unable to repay your creditors.

The two most common types of bankruptcy for individuals are Chapter 7 and Chapter 13.

  • Chapter 7: Also known as liquidation bankruptcy, Chapter 7 gives your creditors a chance to recoup some of the money owed for unsecured debt like credit cards or medical bills. This money comes from selling your personal assets. Certain assets, like your home or personal vehicle, are not allowed to be liquidated. Assets like stocks, bonds, or second vehicles are not protected from liquidation. Eligible debts that aren’t repaid after selling assets are often discharged.
  • Chapter 13: Some people do not qualify for Chapter 7 bankruptcy due to income level. If you make too much money for Chapter 7, you can potentially file for Chapter 13 bankruptcy. In Chapter 13 proceedings, you are usually given a court-approved repayment plan for your debt. These plans are typically between 3-5 years, and any leftover debt at the end of the repayment period may be discharged.

Debt Consolidation

Unlike bankruptcy, debt consolidation does not usually involve liquidating your assets. Instead, debt consolidation works by taking your multiple debt payments and rolling them into one payment.

There are several ways to consolidate debt on your own, including taking out a new personal loan or transferring credit card balances to a new card. However, many people find it’s easier to successfully complete a debt consolidation program by working with a debt relief company. These programs eliminate the need for you to navigate debt consolidation by yourself and shouldn’t require you to get a new credit card or loan. Instead, a debt relief company can work with your creditors on your behalf to negotiate a debt relief plan. Having one monthly payment instead of multiple due dates, payment amounts, and creditors can help you reduce the chance of missing a payment. You’ll also get the added benefit of working with an experienced Certified Debt Specialist to help you explore options that work for your financial situation.

Pros and Cons of Bankruptcy

Is bankruptcy right for me? Before you can answer that question, you need to understand the potential benefits and hazards of filing for bankruptcy.

Pros

The best possible outcome to bankruptcy is your debt being eliminated completely. This gives you a chance to essentially restart your financial obligations. If your bankruptcy filing is successful, you could be out of debt in a matter of months to years either through discharged debts or a repayment plan.

Another benefit of bankruptcy is the possibility that you won’t have to pay back all of the money that you owe. Chapter 7 filers may have most of their debt discharged if they don’t have a lot of assets available for liquidation. Likewise, Chapter 13 filers usually have any remaining debt discharged after successfully completing the repayment program.

Cons

The largest drawback of bankruptcy is the potential loss of assets and the cost of filing. To file for bankruptcy, you’ll probably be paying attorney’s fees as well as filing fees, court fees, and fees for any required credit counseling programs. This can quickly add up to several hundred or several thousand dollars.

Additionally, bankruptcy is likely to wreak havoc on your credit score and financial history. As long as your bankruptcy filing is on your credit report, you may find it difficult to get a personal loan, take out a mortgage, or buy a car with financing. Chapter 7 bankruptcy stays on your credit report for 10 years, while Chapter 13 filings stay on a credit report for 7 years.

It’s also highly unlikely that your debts will be completely erased through bankruptcy. Even if you are one of the few who has all of their debt eliminated, you are likely to have few assets left. This, combined with a damaged credit report, makes bankruptcy a potentially hazardous debt relief option.

Pros and Cons of Debt Consolidation

Just like bankruptcy, debt consolidation has risks and rewards that need to be considered as you ask yourself, “Is debt consolidation right for me?”

Pros

Debt consolidation’s biggest advantage is the potential to reduce stress caused by multiple debts. Consolidation allows you to simplify your debt repayment into one monthly payment.

Depending on your individual creditors, your Debt Relief Team may be able to negotiate a lower total amount of debt owed. Debt consolidation allows you to work with your debt relief company and secure a potential end date for your debt repayment. Having a set finish line for reducing or paying off your debt may provide you with the motivation you need for a successful debt relief program.

Cons

An unfortunate drawback to debt consolidation is that you will often need to have fair to good credit if you’re planning on opening a new credit account or getting a new loan on your own. You may not be offered better terms than your existing debt. However, your credit is unlikely to be a factor if you enroll in a debt consolidation program from a reputable debt relief company.  Often, a debt relief company will be able to negotiate with creditors on your behalf and may even be able to reduce the amount that you owe.

Is Bankruptcy Right for Me?

More often than not, bankruptcy is not the preferred option for people trying to get out of debt. It’s commonly only used as a last resort due to the potential effect on your credit report and assets. However, if you simply don’t have the ability to repay your debt, bankruptcy may be your best choice.

Before making the choice to file for bankruptcy, you should work with a debt relief company to explore any other potential options. You’ll want to make sure you completely understand the consequences that come from bankruptcy, including the time likely needed to rebuild your credit.

Is Consolidation Right for Me?

Choosing a debt consolidation program is usually a good choice if you have to the ability to consistently make your monthly consolidated payment. Consolidation may also be a good option if you are looking to make managing your debt easier and remove the confusion of multiple due dates or payment amounts.

For people without the means to repay their debts, debt consolidation may end up working only as a temporary fix instead of a long-term solution.

Find the Right Debt Relief Program for Your Debt

It’s important to speak with an experienced debt relief company to better understand your best options for debt relief. At Accredited Debt Relief, we’ve helped numerous people avoid bankruptcy and reduce or eliminate their debt through a successful debt consolidation program. Contact us today to speak with a Certified Debt Specialist and get a free consultation to help you learn about your debt relief options.