Debt Consolidation vs. Bankruptcy
If you’re someone who has taken on many credit card loans and has now got themselves stuck in the debt spiral, your options are limited. Taking on a lot of credit card debt can cause significant problems in your regular life. This might result in you ending up living paycheck to paycheck.
Many people have used the bankruptcy and debt consolidation options to help with debt. The two we discuss in this article are probably the most common options used. Below, we are going to weigh up some pros and cons of each option so you can make an educated decision to which is probably the best for you.
Debt management is a strategy used to bring down the interest rate and lower the monthly payment on credit card bills. If you have enough income to be able to afford a monthly payment schedule, then this is the best choice.
Debt management does not require you to be taking out a new loan. Your credit counselor works with your lenders to make it easier to pay back the debt that you already have accumulated. Credit counselors can often bring down the amount you have to pay by 8%, and they can also work towards eliminating late fees.
You can also take out a consolidation loan that to help you pay off your credit card bills. This option is usually useful when you have a good credit score. The purpose of this is to achieve a lower interest rate on a new loan. You can then manage all your debts under one roof and one monthly payment.
Debt consolidation loans can help you save money that would otherwise go in interest payments. Credit card payments usually charge interest rates as high as 17%, and if you have a loan at 12%, then you will be able to save 5% of interest, which can clump up to form a considerable amount.
The third debt consolidation option is that you can try calling up your credit card companies to negotiate an offer. Essentially, propose to repay the loans but at a lower interest rate. For this, you will have to conduct some research to find the best strategies to bring your interest rates down.
Benefits Of Debt Consolidation
If your debt consolidation plan has a lower interest rate than your actual interest payments, then you will be able to save more money.
Debt consolidation is also a good option for those who are not eligible to file for bankruptcy. This is because of their assets exceeding the defined limits.
Also, you might even be able to opt for a bad credit loan to deal with your consolidation. You would just need to compare interest rates beforehand to understand what you’re happy paying back.
Cons Of Debt Consolidation
For debt management, there is the inherent risk that if you miss out on a single payment, your credit card company will jack the prices right back up. Missing a single payment is a real risk because the process can take as long as three years. Meaning that you have to make 36 credit payments precisely on time and in sequence.
Once you’re in a debt plan, you then have a debt management notation on your credit score. The notation will be removed when you clear yourself of the debt.
Regarding a debt consolidation loan, the major disadvantage is that you will (in most cases) need to put up your property as collateral. This is sense of security for the lender, in case you’re unable to pay back the loan. Unfortunately meaning that you might end up losing your home.
Another problem with debt consolidated loans is that they are prone to reduce your credit score.
Bankruptcy is perhaps the most extreme route. But unfortunately for some people, it is the only feasible option. If you’ve analysed your debt and determined that there is absolutely no way that you can pay back the loan, you can file for bankruptcy under Chapter 7 and Chapter 13.
Historically, many people have been able to walk out of bankruptcy debt-free. Figures by the American Bankruptcy Institute found that people who filed for Chapter 7 bankruptcy had most of their debts removed. So, in essence they were able to walk away without repaying their debts.
In Chapter 7 Bankruptcy, you are forced to sell your assets except for those assets that are exempt under state law. The nonexempt property is either sold or surrendered. All your remaining debts are discharged on completion.
In Chapter 13 bankruptcy, you can keep certain assets as long as you plan to pay off your debts within three to five years. In chapter 13, an administrator gets involved, and you have to pay your debts through him.
Like most things in the UK, we follow on from what the USA has implemented. There’s no doubt that you will have to hire a solicitor or a good accountant though. It’s pretty complex and technical arranging bankruptcy.
Pros of Bankruptcy
In the case that most of your debts are forgiven, Bankruptcy can enable you to have a fresh start. If you are successful in your case, you get to walk away debt-free.
Cons of Bankruptcy
The most significant disadvantage of filing for bankruptcy is its massive impact on your credit score. If you register for bankruptcy, your credit score may go down by as much as 300 points immediately.
Bankruptcy shows up on your records for up to ten years. This can make it extremely difficult for you to secure a loan or mortgage. Bankruptcy reports are also public information that anyone can see, if they wish. Being Bankrupt might also affect your current employment or the process of it.
What Should You Choose?
In my opinion, filing for bankruptcy should be a last resort because of its long-lasting implications for your future. Bankruptcy may seem like a smart move because you might end up virtually paying nothing. However, filing for bankruptcy can damage your reputation for a long time and reduce your prospects of jumping on the property ladder.
Debt consolidation makes more sense, even if you have to end up paying back more money. If you’re in a much better financial position, you should look towards consolidating your debt. However, that is often not the case, and many people have to eventually consider bankruptcy because paying back the loan isn’t an option.