Which is Better, Debt Consolidation or Chapter 7 Bankruptcy?
Debt quickly becomes overwhelming when it’s too much for the person to easily pay back. The majority of people right now carry at least some debt. If you have a significant amount of debt and you’re having trouble repaying it, you may be considering debt consolidation loans or looking into Chapter 7 bankruptcy. Both provide a way for you to clear your debts and reset your finances, but both are very different. You’ll want to compare both to find out which one is best for you to use.
Look into Exactly How Much You Owe
The first step is to figure out exactly how much money you owe. You’ll need to create a list of who you owe money to and how much money you owe to each of them. You’ll want to consider interest rates and your income to see how your current repayment plan is working and whether you really need extra help. If you’re finding it’s hard to pay all of your bills each month, it’s going to be a good idea to look into debt consolidation or bankruptcy.
What Bankruptcy Involves
Bankruptcy is one option everyone has heard of. Chapter 7 bankruptcy is for individuals who are having trouble repaying their debts. In this type of bankruptcy, any nonexempt assets will be liquidated to repay any creditors. This can help repay credit cards, personal loans, utility bills, medical bills, bills in collections, payday loans, money owed due to contracts, and promissory notes. Assets include most of what you own, but there are exemptions such as money in retirement accounts. Homes and vehicles may be protected, but this isn’t automatic. The bankruptcy will stay on your credit report for 10 years, but the impact will lower over time and the amount of the impact will vary.
What Debt Consolidation Involves
Debt consolidation involves obtaining a loan to be used to repay other types of debt. This does mean you’re borrowing money to repay your debts, but it can help by lowering the interest you’ll need to pay because you’re only paying one loan instead of each debt individually. This can be used for credit cards, utility bills, medical bills, student loans, taxes, any bills in collections, and more. This does not automatically result in a large drop in your credit score but can cause a small drop when you apply for the loan. Over time, your credit score may increase as you repay your debt. If you do not repay this loan, however, it can impact your credit score negatively.
Pros and Cons of Filing Bankruptcy
Bankruptcy can help you reset your finances because you can eliminate some or all of your current debt. This can make a significant difference in the debt amount you need to repay. With Chapter 7, the debt that is not covered by asset liquidation is typically discharged. You will be able to rebuild your credit in the long term, starting with small steps, and can come out ahead as far as your credit score once the bankruptcy is no longer on your credit history.
On the other hand, you could lose your property and your assets because any assets that can be liquidated will be used to pay your debts. There are some assets that are exempt, but you will need to speak with a lawyer to find out which assets are exempt. You will also need to pay lawyer and court fees for the bankruptcy and it might not completely eliminate the debt you owe. Some debts, like student loans, are difficult to discharge in bankruptcy. The bankruptcy will stay on your credit report for 10 years and can be seen by anyone as they’re a public record. Employers who check your credit history, for instance, will be able to see the bankruptcy.
Pros and Cons of Debt Consolidation
Debt consolidation allows you to put all of your debts together so you’re paying just one lender each month. This can lower the amount you’ll pay in interest. You may even be able to get a lower interest rate on the consolidation loan compared to your credit card rates, saving you more money. Since you use the loan to repay your credit cards, you will still be able to use them and your credit will not be impacted as much as with a bankruptcy.
On the other hand, although you can get rid of other debt with a debt consolidation loan, you’re taking on new debt. If you’re still spending with your credit cards, you’re building new debt before you’ve paid the consolidation loan and getting into a larger financial hole. It may also be difficult to get this type of loan if your credit score is already low, which is very possible if you owe a lot of money and are having trouble making your monthly payments. Many debt consolidation loans require a higher credit score.
How to Choose the Right Option
If you’re ready to start working on your finances and getting out of debt, you’ll need to think about whether you want to look into Chapter 7 bankruptcy or a debt consolidation loan. Which option is right will be different for everyone. A debt consolidation loan is better if you plan on buying a home or a vehicle within the next 10 years and will not want a bankruptcy in your credit history. It’s also the better option if your financial situation is improving and you’re sure it can be repaid. Bankruptcy might be the better option, on the other hand, if repaying the consolidation loan is going to be difficult. When the amount owed is simply too much, bankruptcy can help you get rid of the debt and start over.
If you owe a significant amount of debt and you’re trying to find the right solution, both debt consolidation and bankruptcy are options for you to consider. Start thinking about your current situation, then speak with a bankruptcy lawyer to learn more about which option might be better for your situation.