Should You Consolidate Debts Or File Bankruptcy? Here’s Your Answer

 Consolidate debts or file bankruptcy?

Should you consolidate debts or file bankruptcy? 

Choosing between bankruptcy and debt consolidation is a tough task. It’s almost like choosing between a pizza and a burger. Both are equally delicious but have some side effects. But choosing the right option can help you to walk on the right path and feel great about your finances. In this post, we will discuss both debt consolidation and bankruptcy in detail and help you make the right decision.

Debt consolidation

What is debt consolidation?

Debt consolidation is a process wherein you can pay what you owe at a low interest. It helps you to pay as per your affordability within 3-5 years. You can enroll in a debt consolidation program and pay back your creditors through an affordable monthly repayment plan. Sure, you have to pay a fee to the debt consolidation company for their professional service. But that is negligible in comparison to the relief that you’ll get after consolidating your debts. Soon after you enroll in the consolidation program, creditors and debt collection agencies will stop calling you. And, you’ll get a respite from the disturbing collection calls.

What is bankruptcy?

Bankruptcy is a legal debt relief process, which is monitored and executed by the bankruptcy court. 

The bankruptcy trustee presides over the case and helps the debtor to discharge debts either through Chapter 7 bankruptcy or through Chapter 13 bankruptcy.

Chapter 7 Bankruptcy

In the case of Chapter 7 bankruptcy, consumers can discharge debts within 3-4 months. Yes, it is that fast. But there is a catch. Consumers have to give up their non-exempt assets. The bankruptcy trustee will sell all the non-exempt assets and pay off the debts within 3-4 months.

Chapter 13 Bankruptcy

In the case of Chapter 13 bankruptcy, consumers don’t have to sell their non-exempt assets. They have to pay off their debts through a court-monitored repayment plan. Usually, this repayment plan stretches between 3 years and 5 years.
Bankruptcy is a legal debt relief process

Should you consolidate debts or file bankruptcy?

I hope that the basics of debt consolidation and bankruptcy are clear by now. So, let’s dig into the main subject of discussion today.

What should you do when you’re drowning in debts? Should you file bankruptcy or should you consolidate your debts?

There is no doubt that bankruptcy has one big positive side.

As soon as you file bankruptcy, the court imposes an automatic stay on

  • the collection calls, 
  • wage garnishment,
  • foreclosure, 
  • eviction, 
  • utility disconnection, 
  • etc. 

The debt collectors can’t call you regarding payments because the bankruptcy court is already looking into the matter. It’s a huge relief, which you don’t get in a debt consolidation program. In this program, debt collectors can call you if the situation demands. But usually, debt consolidation companies handle all the calls.

Should you file bankruptcy just due to this one benefit?

Wait! Don’t make a prompt decision because the story is not over yet.

Chapter 7 bankruptcy remains on your credit report for 10 years and drops your credit score by more than 200 points. For 10 years, prospective creditors would know that you have failed to manage debts on your own and filed bankruptcy to get relief.

According to USCourts,
Debtors should be aware that there are several alternatives to chapter 7 relief. For example, debtors who are engaged in business, including corporations, partnerships, and sole proprietorships, may prefer to remain in business and avoid liquidation. Such debtors should consider filing a petition under chapter 11 of the Bankruptcy Code. Under chapter 11, the debtor may seek an adjustment of debts, either by reducing the debt or by extending the time for repayment, or may seek a more comprehensive reorganization. Sole proprietorships may also be eligible for relief under chapter 13 of the Bankruptcy Code.

What if you file Chapter 13 bankruptcy? Well, it will be there as a negative item on your credit report for 7 years. There is no way to get rid of it before that.

Debt consolidation doesn’t hurt your credit score because you’re paying the full amount. Rather, as you make monthly payments on time, your credit score goes up gradually. However, if you charge credit cards and don’t pay the bills, then your credit score will go down again.
Get a bankruptcy attorney 

The Bankruptcy code involves lots of complex laws. You have to follow each one of them. If you don’t, then your bankruptcy case can be dismissed. Unfortunately, 98% of consumers don’t have any idea about the laws. Hence, they are completely dependent on the bankruptcy attorney for navigating the process.

Debt consolidation doesn’t have too many complicated laws. All you need to do is read the contract and make payments as per the terms and conditions.

Bankruptcy is an expensive legal process. First, you have to pay a fee to the bankruptcy attorney, which is quite expensive. Plus, there are various types of bankruptcy fees you have to pay.

Recently, the 'no-look' fee of the bankruptcy attorney has gone up from $3500 to $4500. This means you have to pay $1000 more to the attorney.

Debt consolidation is not that expensive. You can compare the fee structure of all the companies, and then choose the one that has a reasonable fee structure. So, you have a choice.

To sum up,

Given a choice, debt consolidation is a far better choice than bankruptcy. It helps you to pay back your creditors as per your affordability. It gives you the freedom to lead a life on your terms. Plus, it pulls up your credit score gradually. Besides, you won’t lose any assets or properties.

In Chapter 7 bankruptcy, you lose your non-exempt assets. In Chapter 13 bankruptcy, you don’t have any freedom. As per the law, you have to make extra payments to creditors when there is a windfall. You can’t use it for another purpose. In debt consolidation, there is no such rule. No one can force you to make extra payments when your income increases. But yes, if you do make additional payments, you’ll get out of debt fast.

Finally, you’re likely to lose 200 points after declaring yourself bankrupt. In debt consolidation, your credit score won’t drop. Rather, it will go up gradually.

Author: Stacy B Miller is the content editor at Oak View law Group who loves to express her opinion on financial and legal issues through web articles. Till now, her articles have been published on various top-notch websites and she plans to write many more for her readers. 

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