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How to decide whether bankruptcy or debt consolidation is better for you

On Behalf of | Jun 2, 2021 | Bankruptcy

Mounting debt can be an overwhelming experience. You might be between two less-than attractive options: debt consolidation or filing bankruptcy.

There are both benefits and downsides associated with each. You’ll want to weigh certain personal circumstances when deciding which option is best for you.

What is debt consolidation?

This process involves consolidating what you owe with an unsecured personal or home equity loans or carrying out a balance transfer between credit cards. Many debtors appreciate how they can generally lock in a lower interest rate and just one payment every month versus multiple ones by pursuing debt consolidation.

What is bankruptcy?

Consumers generally have two options to choose from when pursuing bankruptcy: Chapter 7 versus Chapter 13. Chapter 7 allows you to potentially discharge most of your debts. Student loans are generally one exception. Chapter 13 gives you the ability to pay some or all of your debts with a new repayment plan.

Some things to know about debt consolidation and bankruptcy

There are fees associated with pursuing debt consolidation, such as loan origination fees. Debt consolidation companies will give you a payoff date for when you’ll finish paying what you owe, but this approach doesn’t end up with your debts discharged in the end. You’ll instead have to pay them off over time. Debt consolidation companies often require you to have either good credit or a consigner if you want to lock in the best interest rate and the lowest possible monthly payment.

If you cannot demonstrate that your income is too low to meet the demands of your debt, Chapter 7 bankruptcy is not an option. Chapter 13 might not be either. A downside to bankruptcy is that the court may require you to apply non-exempt assets to pay off your creditors. One positive associated with bankruptcy is that it can allow you to discharge debts fully. Your credit will recover in time even though bankruptcy remains on your report for seven to ten years after it happens.

Deciding whether to choose bankruptcy or debt consolidation isn’t likely to be easy. Both bankruptcy and debt consolidation will impact your credit rating. An attorney’s review of your personal situation can help you determine which is best for you.