The combined debt of US households is now over $15.6 trillion. As the cost of living rises, it can be easy to fall into the spiral of debt and soon feel you can get out. So what are the options when all else seems to fail?
Debt consolidation and bankruptcy are the two main choices, though even these may not be available to everyone. Read on as we give you everything you need to know to make an informed decision.
What Is Debt Consolidation?
Debt consolidation involves taking out one large loan and using it to pay off other loans. This allows you to make a single easy-to-manage payment to a solitary creditor each month. When you manage to get one with a lower interest rate, it reduces the amount you have to pay each month.
Ways to Consolidate Debt
There are several ways you may consider consolidating your debt. They all work around the principle of having a single payment with a lower interest rate.
Credit Consolidation
There are not-for-profit credit counseling agencies in Philadelphia with programs you can enroll in. They will collect monthly payments and a service fee until your debt gets eliminated.
Getting a Loan
This is the most popular method. You get a loan from an online lender, bank, or credit union and pay off your debts. The trick is to get an outstanding interest loan if you have a low credit rating. Some bank loans may not be much of an improvement on credit card debts.
DIY Approach
It is unlikely creditors will get much of the money owed back when you go bankrupt. If you are almost bankrupt, you may be able to contact them and renegotiate terms. Some may view that this is better than nothing, though they have no legal obligation to accept your request.
Pros of Debt Consolidation
Debt consolidation has several advantages over bankruptcy. The most important of these are listed below.
You Maintain Access to Credit
This could be positive or negative, depending on how committed you are to reducing your debt. Unless you enter a consolidation agreement that prohibits it, you can keep your cards. This can be helpful should you need an emergency line of credit when recovering from debt.
If you have significant amounts on your cards or are missing payments, they may get frozen regardless. You should only keep them open if you know you won’t spend more.
Protection of Reputation
When bankruptcy occurs, it goes on public records. That means anyone can find out that you have been declared bankrupt, damaging your financial reputation. This does not happen with debt consolidation, which counts as another loan, which is strictly confidential.
Debt Management Is Simplified
When debt consolidates, you don’t have to balance different payments, interest rates, and dates. Instead, you only have one payment to make each month. When you get a lower interest rate, the amount can be less, causing your finances more manageable.
Cons of Debt Consolidation
Though debt consolidation is more manageable, it is not for everyone. Some people may be too far into debt for it to work, and payments may cost.
Paying More Long Term
Consolidating debts comes at a cost which means taking out a larger loan paid back over a more extended period. This allows you to have a low rate of interest with manageable payments. However, the longer you pay off the loan, the more interest you pay.
You Could Lose Property
You will get a lower interest rate when you consolidate the loan, making monthly payments more manageable and more affordable. However, you could lose your assets and property if you fail to make the payments.
You should also be aware of cross-collateralization clauses. This is when a company has the right to take other property or belongings it has financed when you default on payments.
For example, you may have taken out a loan for an RV. If you default on the debt consolidation loan, they have the right to take the RV even if you kept up payments on it and didn’t miss any.
What Is Bankruptcy?
Bankruptcy is a way for those in debt to release themselves from contracts with creditors when they can’t pay. Without assurances, there is no obligation to pay back the debt. There are two types of bankruptcy: Chapter 7 (liquidation) or Chapter 13 (reorganization).
Chapter 7 Bankruptcy
When you file for Chapter 7 bankruptcy in Philadelphia, in exchange for being exempt from your debts, you agree to the liquidation of your assets. You may only keep non-exempt property, though most people do not own any of this. They are sold off and used to pay back some outstanding amounts.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy works by reorganizing your debt. You have between 3 and 5 years to pay the amount in installments.
Pros of Bankruptcy
While filing for bankruptcy sounds final, it has several advantages. We have listed the most important below.
Abatement of Creditors
Once bankruptcy has been filed, you get protection known as the automatic stay. Collection agencies are no longer allowed to call or harass you; foreclosures and repossessions can not occur, nor can wage garnishment.
New Start
With a Chapter 7 bankruptcy, most of your debts will be eliminated. When you have Chapter 13, you can even keep some of your assets, paying back financed items at reduced rates. Both options clear the way for you to make a fresh financial start.
Cons of Bankruptcy
Bankruptcy is quite final. While it does offer a fresh start, you lose lots of the assets and hard-earned finance you had before.
Some Debts May Remain
Some debts can not be written off and may remain. Student loans are one of the significant debts that are not dischargeable. Taxes, fines, child support, and obligations gained through fraud are all payable.
Long Term Reputation Damage
When you file for bankruptcy, it does damage your financial reputation. As records are public, it can cause myriad problems in the future.
If you try renting a property, you may be dismissed by sure landlords or letting companies. Some occupations may also ban you from holding positions. These are usually public office positions where you would handle finance, such as charitable trustee positions.
Damage to Future Credit Applications
Your credit score will drop. Any loan of over $500 legally requires you to announce any previous bankruptcies. You will also find high-interest rates and low limits for any credit you are accepted.
Debt Consolidation or Bankruptcy?
Deciding between them depends on your circumstances. The main difference between debt consolidation and bankruptcy is that with debt consolidation, you get to keep many of your assets, including property.
This makes consolidation great if you fell into debt for one or two large bills, such as medical payments. By consolidating and paying on time, you can improve your credit score.
However, if you have a problem with spending, consolidation is unlikely to help. You may just end up getting yourself mired in more debt.
Debt consolidation is not available to everyone, and even when it is, some people may not be free from debt within five years. In these instances, bankruptcy becomes the only option.
Bankruptcy destroys your chances of having a good credit report for the next ten years. You lose your assets, with only a few being eligible for protection.
However, even bankruptcy is not available to everyone. To file for Chapter 13, you must have an income and debts of a specific size. For a chapter 7 bankruptcy, you must have a monthly payment less than the median for a family of your height in Philadelphia.
Can You File for Bankruptcy on Your Own?
You can file for bankruptcy on your own. However, the courts do not recommend you do it without the assistance of a bankruptcy attorney. There are over 30 pages to fill in and many stipulations, additional paperwork, and proof you must provide.
Call Us at 215-545-0008 and Talk to Our Experienced Bankruptcy Attorney in Philadelphia
Now you know the difference between debt consolidation and bankruptcy, decide which is for you. If you decide bankruptcy is the best or only option, you need an attorney. You may be able to get financial advice or assistance.
Sadek Bankruptcy Law Offices should be your first stop. We deal with several financial situations, from bankruptcy to foreclosure. Contact us here to book an appointment and let us help you regain financial freedom.