Have you fallen on difficult financial times and are struggling to make ends meet to matter how hard you work? If so, you may have heard that bankruptcy and debt consolidation can help you overcome your debt and get back on the road towards financial freedom. But what are the differences between these popular strategies, and which one is better for your individual situation? To answer this question, we must first examine each individually and determine your goals.
What is Debt Consolidation?
In simple terms, debt consolidation is a debt refinancing process that involves taking out one loan to pay off several others. When you consolidate your debts, you reorganize numerous payments into one, single payment through a secured or unsecured loan. While debt consolidation can help to simplify your debt management, lower your interest rates, and protect your credit in the short run, there are also several disadvantages to consider.
Debt consolidation oftentimes allows you to lower your interest rates and monthly payments by extending the repayment period. Generally speaking, the longer you stay in debt, the more likely it is that you will end up paying more in the long run. Any money you save through debt consolidation may also be considered income by the IRS, subjecting you to increased tax liability. Worst of all, if you should ever default on a debt consolidation loan, you could end up losing your property.
What About Bankruptcy?
Conversely, bankruptcy allows you to restructure or eliminate your debts while under the protection of the federal bankruptcy court. Most individual consumer bankruptcies fall into two categories: Chapter 7 and Chapter 13. Chapter 7 bankruptcy involves selling off your non-exempt liquid assets to satisfy creditors, while Chapter 13 bankruptcy involves establishing a 3-5 year court-approved repayment plan.
Individuals who file for bankruptcy are provided protection against creditor communications, harassment, and collection efforts through a court injunction known as an “automatic stay.” Those who pursue debt consolidation are not afforded this privilege. Furthermore, bankruptcy serves as a way to achieve a fresh financial start, with any dischargeable debts being permanently forgiven. While bankruptcy will lower a person’s credit score in the short run, filing for bankruptcy is often the first step towards long-term credit restoration through responsible credit card use and timely payments.
Bankruptcy can eliminate the following types of debt:
- Credit card debt
- Medical bills
- Personal loans
- Utility bills
While bankruptcy is usually a better option, it is always important you consult with a knowledgeable attorney before making a decision. At the Law Offices of David Kovari, PA, our Boca Raton bankruptcy lawyer has nearly 20 years of legal experience and can help you get on track towards a debt-free future. To find out more about your debt relief options, call (800) 843-1165 or schedule a complimentary consultation online today.