Debt Consolidation or Bankruptcy: Which Offers the Desired Relief?

Men and women in need of debt relief should consider debt consolidation. Using this technique, the individual merges all debts into one financial product, possibly lowering their interest rate in the process. They may accomplish this goal using a variety of methods. Some people opt to take out a debt consolidation or personal loan to pay the debts in one lump sum payment.

With the balance transfer option, the person gets a low-interest rate credit card and moves all credit card accounts to this card. This lowers or stops interest during the card’s introductory period. Finally, a debt management program helps individuals who find they struggle to manage their finances. With this program, the debtor gets credit counseling along with rolling all debts into a single monthly payment, again often with a lower interest rate.

The Pros and Cons of Debt Consolidation

The advantages and disadvantages of debt consolidation vary by the method used to achieve this goal. Nevertheless, all methods help boost a person’s credit score when compared to other debt relief options, as a negative item doesn’t appear on the debtor’s credit report. Individuals considering bankruptcy should investigate debt consolidation first for this reason, and anyone considering other relief options should do the same.

One problem debtors often encounter involves missed payments. They owe money to several individuals or entities and can overlook one or more payments each month because of the sheer number they have to pay. Merging all debts into one financial product reduces the risk of this happening. Debtors benefit because late or missed payments lead to penalties, fees, and possibly a higher interest rate. When this happens, the amount owed increases, and this can lead to the debtor becoming discouraged and giving up. The single payment helps to eliminate this concern, which every debtor will appreciate.

However, a person won’t get out of debt rapidly using debt consolidation options. For people in need of immediate relief, other options must be considered. A person can learn more at Debt Consolidation USA about obtaining relief through the merging of debts.

Bankruptcy

Bankruptcy, in contrast, allows an individual to clear their debt rapidly. This method damages the credit score, however. In addition, debtors must report this on various documents in the coming years, such as on job applications, if asked. People may feel uncomfortable knowing they must do this and look for other options. However, don’t let this be the only thing holding you back from considering debt relief using this method. Two bankruptcy option are commonly used by individuals.

Chapter 7 bankruptcy offers a means for the debtor to clear their debt within four to six months. The bankruptcy trustee sells the debtor’s available assets that aren’t exempt from the process to help clear the debt. Any person looking for the quickest way to obtain debt relief often chooses this option, but it is only available to those who pass a means test. If a person does not pass this means test, they must consider other debt relief options. One option these men and women should look into is Chapter 13 bankruptcy.

Chapter 13 bankruptcy, in contrast, takes longer when it comes to clearing the debt. With this option, debtors create a repayment plan that allows them to pay back a portion of the funds owed. Debtors find they may spend up to five years making payments as part of this plan. When a person compares this to debt consolidation options, they often find there is no difference in terms of the time involved to clear the debt. One benefit of choosing Chapter 13 bankruptcy instead of Chapter 7 is Chapter 13 impacts the credit score less than Chapter 7.

Neither bankruptcy option eliminates certain types of debt. For instance, bankruptcy will not erase unpaid child support. Debtors need to understand which debts the court will discharge and which remain once the process is complete. This ensures there are no surprises when the process is complete. A person might not get the relief they are expecting and discover their future doesn’t look as bright as they envisioned.

The Pros and Cons of Bankruptcy

Bankruptcy negatively impacts the debtor’s credit score. Chapter 7 bankruptcy remains on the debtor’s report for ten years. Chapter 13 bankruptcy stays on the report for seven years. Debtors must take this into account when deciding which debt relief method to use. Furthermore, as mentioned above, the courts don’t certain debts in a bankruptcy proceeding, and the debtor might find they don’t get the level of relief they desired when starting this process.

Consumers must consider all debt relief options, as what works for one individual won’t be appropriate for another. For instance, an elderly individual living on a fixed income benefits greatly from bankruptcy. The process eliminates the debt, leaving more money for the debtor to use on other expenses each month. This can be of great importance to many people who find they struggle to keep food on the table and pay their necessary expenses, such as housing and electricity. They may not have the time to complete a debt consolidation plan.

For younger individuals, debt consolidation makes more sense. The person has the time needed to complete the repayment plan, and this impacts the credit score. As a result, they might find they have a better financial future and they’ll find it easier to obtain credit in the future. Some individuals find they get credit easily after filing bankruptcy because lenders know they cannot do so again for a certain period. This gives them the confidence to loan money to the individual.

A person needs to consider all options available to them. Each debtor’s financial situation is unique, so the solution to debt problems needs to be unique as well. Debt consolidation and bankruptcy serve as two options, but there are others. For instance, a person might find they want to take part in credit counseling to reduce their debt or look into a guide to debt settlement to pay less than what they owe on each debt. It’s all a matter of what works for a particular person.

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Christophe Rude
Christophe Rude
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