Both debt consolidation and bankruptcy are legitimate options, but there are huge differences between them. You will need to look at your own situation as well as the goals you have in mind in order to determine which of these (or neither) would work the best for you. It helps however, to know exactly what each process entails.
What Happens in a Chapter 7 Bankruptcy?
In a Chapter 7 bankruptcy, credit cards and debt are discharged and the debts are, in a way, wiped clean. They remain on your credit report, but you do not owe the balances once the bankruptcy is discharged. Usually you are allowed to keep your car and any assets that are necessary to everyday living. You are also usually able to reaffirm debts such as a home loan, which may result in lower interest rates and lower monthly payments.
In order to determine whether you should file bankruptcy, you may want to compile a list of all of your living expenses first. Include food and rent and reasonable expenses that are necessary. The list will also serve as somewhat of an alert. Are there expenses on your list that can be lowered or taken out? Can you spend less in any area? Remember, that the money that goes to unnecessary expenses can be used to pay on bills with creditors. If you are able to find a number of areas you can cut back in, you may not need Chapter 7 or debt consolidation and can budget your finances in a way that fixes your financial situation on your own.
After you have your list of living expenses, calculate the payments of your current debts. If you cannot pay these off in the next 3 years, even after cutting down on living expenses, you may want to consider filing bankruptcy. First, however, contact the creditors and see if they can work with you on either the interest rates or payments. Sometimes, you may be able to qualify for a hardship program which can cut your monthly credit card payments drastically.
Debt Consolidation
Debt consolidation companies are able to get your payments and interest rates lowered and then consolidate all of the payments into one payment per month. Debt consolidation does not typically affect your credit score, but if you settle and instead agree to a lower payoff through debt settlement, you could see a drop in your credit score. If you are in a debt consolidation program, a comment may appear on your report until it is paid off, but does not affect your credit score, at least not in the way that a bankruptcy affects it.
In order for debt consolidation to be effective, you have to be able to pay the monthly payment. Otherwise, you may end up paying for a service that gets you even further in debt. You could essentially consolidate your debt yourself without paying or going through a debt consolidation agency, by transferring balances to lower interest credit cards and paying off high interest cards if you have the funds.
Although debt consolidation does not slam your credit rating as hard as bankruptcy, you are also not exactly debt free. A number of problems can occur through debt consolidation when you do not budget your money and make your payments on time or as agreed upon. This is one of the main reasons that bankruptcy and debt consolidation fail for consumers, because the fix or solution won’t matter if you don’t change any bad spending habits you may have that caused the problem. In this respect, debt consolidation can end up being a waste of money and you still have the debts. At least with bankruptcy, your debts are completely discharged and then it is up to you to take advantage of the fresh start.
Another thing to consider is whether your debts are keeping you from being able to pay for necessities like food. If you find yourself cutting out the things you need for normal everyday living in order to make your credit card payments, bankruptcy is probably the way you should go. Although we all want to be able to pay our debts, it isn’t quite worth it to me if I am not able to feed my child. If you are able to make a monthly payment that covers your debt through a debt consolidation agency, weigh the fees for their services and how long the payments will have to be made.
Make sure when considering bankruptcy or debt consolidation that you look at all angles before making a decision. It is not a decision that should be taken lightly or made willy-nilly as it could potentially change your life for the next 10 years.