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Debt Consolidation vs. Bankruptcy
If you have reached the point where you simply cannot pay your bills any more, you may be considering either consolidating debts or declaring bankruptcy. TV commercials would have us believe that both things are easy and effective.
On the face of it, consolidating debts would seem to be a better route to take, although both approaches have their advantages and disadvantages. And bankruptcy does not mean the end of your life as you know it – although you should be prepared for some major difficulties in your life.
A debt consolidation program (sometimes also called debt management) means entering into a contract with a debt consolidation service who will arrange lower payments to your creditors. Your interest rate and monthly payments will both be significantly lower - and you will also have an end to creditors harassing you by phone or by mail.
Apart from the lower payments, there are several other advantages. You only have one check to write every month, instead of several different checks for payments to credit cards, store cards and other creditors. Virtually all major creditors participate in debt consolidation programs.
Most debt consolidation companies take care of all the paperwork and liaise directly with the creditors - so you don’t have to deal with them. You will still receive statements from your creditors, so you can track your progress. The company may also be able to offer direct debit from your bank account at the same time each month.
Debt consolidation has several other advantages. The program is generally discreet and confidential – and the information is not given to your employer, although it will appear on your credit report. You may also have to cancel all your credit cards and assure the consolidation company that you won’t take out any more – however, you may be allowed to keep and use one.
There is generally a monthly administrative charge to take part in a debt consolidation program
and a debt consolidation program only covers so-called unsecured debts such as credit and store cards. Certain loans that are secured, such as mortgage, home equity loan or car payments are not included in the program. You will still have to make your car and house payments.
Bankruptcy is just one of those words that have a stigma attached to it. For many people though, it really is the only answer to spiraling debts – around 1.6 million Americans file for bankruptcy every year. Divorced women are the most likely people to declare bankruptcy.
Declaring bankruptcy has certain advantages. Any legal proceedings that have been commenced must stop and creditors cannot commence any new ones. Generally speaking, any earnings after bankruptcy has been declared – wages and property – are then exempt to claims of pre-bankruptcy creditors. If you declare bankruptcy, you will usually still keep your house and car.
The biggest advantage of bankruptcy is that is a chance for a fresh start. You are not liable for previous debts or liabilities as long as they were included in the bankruptcy proceedings. And there is not usually a minimum amount of debt required to declare bankruptcy – any amount will justify it.
If you declare bankruptcy, it’s a matter of public record and relatively easy for people to access this information. And to the surprise of many people – filing for bankruptcy isn’t a free process. There are various administrative and court costs, as well as possible legal fees, if you need an attorney.
And of course, your credit rating will be adversely affected by bankruptcy – a bankruptcy may appear on your credit report for 10 years after the filing date. It’s often difficult to get a credit card or car loan for several years, if you declare bankruptcy. You can also not file for bankruptcy again for another six years.
As with consolidating debts, declaring bankruptcy will not eliminate all your debts. Some debts which you may still be liable for include taxes, child support, alimony and student loans. State laws vary, but generally allow a bankrupt person to keep equity in certain things such as a house or car.
Declaring bankruptcy or consolidating debts – it may not be an easy choice. Always seek professional advice before making such a decision. But for many people, it is the only solution – and a chance to start afresh.
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