Bankruptcy vs Debt Consolidation

If you have been having trouble paying your bills, you may have considered several different solutions including debt consolidation and bankruptcy. Each is a viable option that can help struggling debtors regain financial control of their lives. When it comes to bankruptcy vs. debt consolidation, each has advantages and disadvantages that should be carefully considered before making a final decision.

Pros of Debt Consolidation

Debt consolidation involves entering a formal agreement with a debt consolidation service. The service examines your income and the amount of debt you have accumulated. They contact your creditors and arrange for lower interest rates on your behalf. They then lump all of your payments together into one monthly payment to be made directly to the consolidation service. They will distribute the payments to the creditors. The obvious benefits are the fact that you’ll only need to make one payment each month and your creditors will stop contacting you.

You will continue to receive statements from your creditors which will help you track the progress. Debt consolidation is also a free process, so beware of agencies that charge you to utilize their services.

The Disadvantages of Debt Consolidation

The biggest disadvantage associated with credit consolidation is that they can only help with unsecured debt, so if you are having problems maintaining secured debt like your house or car payments, you are still in danger of having those things repossessed for non-payment.

Pros of Bankruptcy

Some turn bankruptcy when struggling with finances as a way to wipe the financial slate clean and start over again. It’s so easy to accumulate debt through credit cards, personal loans, car payments, etc. you may be able to juggle all of your financial responsibilities until the unexpected happens. Maybe you lose your job, or experience an unexpected accident or illness that results in mounting medical bills. Bankruptcy is one way to gain control of the situation. Chapter 13 bankruptcy may even allow you to keep your home or car.

A bankruptcy discharge will automatically release you from personal liability to your debt. It will also prevent creditors from continuing to contact you.

Disadvantages of Bankruptcy

Bankruptcy deserves consideration before making the decision to move forward.  There is a negative stigma attached to this process. A bankruptcy remains on your credit report for 10 years. It can make getting a credit card or any other loan harder to get. Like debt consolidation, bankruptcy won’t get rid of all of your debt. You will still be responsible for unsecured debt including alimony, child support payments, taxes and student loans. Also, bankruptcy is not free.