When faced with debt problems, there are two things that one may consider- to seek bankruptcy or debt consolidation. Which of these two options are better? Experts may have their own opinions when it comes to making the right choice.
Some financial experts may say that bankruptcy is a better choice because it allows you to be completely free from debts. Others may disagree and suggest debt consolidation. In this article, we’ll discuss the basic points about these two options to help you decide which one is the better solution for you.
In the past, anyone can declare bankruptcy and just walk away from debts. Although a record of bankruptcy is a very derogatory mark and stays in your credit report for seven years, many people with huge debts seek bankruptcy as an easy solution. However, since the bankruptcy law has been amended, the process of filing for bankruptcy has become more complicated than it was a few years back.
Today, you can only file for bankruptcy only after completing a credit counselling course from a government accredited counselling agency. The credit counselling agency itself would decide whether or not you need to file for bankruptcy. If you qualify, you need to submit your application and go through the Income Means Test to determine which Chapter of bankruptcy matches your financial situation.
If you’re eligible for a Chapter 7 bankruptcy, you can forget about all your debts to your creditors. However, if you’re only qualified for a Chapter 13 bankruptcy, you’ll be subjected to a mandatory repayment program. With this set-up, you would be required to submit a percentage of your salary each month until your debts are paid.
Debt Consolidation Basics
What about debt consolidation? Typically, debt consolidation is done by taking out a loan to pay off all your debts to different creditors. Afterwards, you’ll be submitting your monthly payments to your debt consolidation company. The length of your consolidation loan’s term would depend on the degree of your debts.
Some people who applied for debt consolidation were able to complete their consolidation loan payments within 6 months. For others with bigger debts, it may have taken years before they were able to complete their repayments.
What is the advantage of a debt consolidation loan over bankruptcy? When done correctly, debt consolidation enables you to avail of easier repayment terms and deal with only one lender. Nevertheless, one must be very strict about submitting his monthly payments on time. Because a debt consolidation loan often requires collateral, there is also the risk of losing your property to foreclosure if you fail to keep up with your payments.
In order to work, a person who acquires debt consolidation must create an effective repayment plan or budget plan to make sure that he can stay true to his payment obligations. Also, one must make sure that he is dealing with a legitimate debt consolidation company to avoid getting scammed or taken advantaged with.