People facing significant financial hardship are often faced with two choices—bankruptcy or debt consolidation. These two options provide different paths to debt relief, and it’s essential to understand the pros and cons of each. Here’s what you should know about them to help you choose the best option for your finances and future.
Bankruptcy should be considered a last-resort option when other efforts to get out of debt have proved unsuccessful. With Chapter 7 bankruptcy, the biggest advantage is that most unsecured debts are eliminated; it’s ideal for those who have little or no income and no realistic way to repay all they owe. With Chapter 13 bankruptcy, debts are reorganized and repaid over a long-term payment plan, similar to debt consolidation; it’s better for people who have the resources to make a regular monthly payment while staying on top of their current bills. Both Chapter 7 and 13 issue a temporary automatic stay on any foreclosures that are in process against you.
Bear in mind, however, that bankruptcy will cause your credit rating to take a hit and stay on your report for up to 10 years. Depending on what you own and the type of bankruptcy filed, you might also have to liquidate certain assets.
Debt consolidation essentially entails taking out a new plan to repay old loans. A lender issues either a secured or unsecured loan and pays back your debt. Then, you repay the loan via a monthly payment. One of the biggest advantages of debt consolidation is that multiple debts are combined into one convenient monthly payment, meaning less for you to keep track of. A single check each month repays everything in the consolidation plan. Another major benefit of debt consolidation is that it doesn't lower your credit score like a bankruptcy does.
On the negative side, debt consolidation requires a relatively stable credit history. You're taking out an entirely new loan, and any lender checks an applicant's credit as part of the process. This means that some people simply might not qualify for debt consolidation. Many debt consolidation plans also come with their own fees and charges that a debtor is responsible for paying.
There are many factors to take into account when deciding between bankruptcy and debt consolidation. The Gil Law Firm is here to help. Since 2000, attorney Rafael Gil III has been representing Houston County, AL, in bankruptcy, Social Security, and personal injury cases. Schedule a free consultation by calling (334) 673-0100 or visiting his website, and start on the path to financial freedom today.