Debt consolidation vs. Bankruptcy Loans

Debt consolidation and bankruptcy are two options available for those who have dug themselves a debt hole. Which option is right for you?

Debt Consolidation

Debt consolidation is a financing option where a debtor takes out one loan in order to pay off many other smaller loans.

Benefits:

Lower Interest Rate: You can secure a new loan with a lower interest rate. Here you can save money on interest payments.

Lower monthly payments: Since you pay a lower interest rate, it is possible to lower the total required monthly loan payment.

Pay the debt off faster: With lower monthly payments, the money saved could be used to pay off the debt sooner.

Save on late fees: By paying just one check every month instead of several, you can manage your money better. There are also lesser chances of forgetting to mail bills and being subjected to expensive late fees.

Downside:

The loan mayrequire collateral: In order to secure the loan, something of value may be required in order to obtain it. If the collateral is a house, this may make it more difficult if you plan to sell.

Debt consolidation loans may be difficult to get approved: If your debt is high, and it probably is, along with a marginal credit score, loan approval may be hard to get.

There may be a fee included in the consolidation loan: This is not a pain-free option as many creditors may include a costly fee as part of the loan. Most importantly, if you choose the Debt Consolidation option, make sure that the repayment arrangements being offered to you are manageable, *from your point of view*.

Bankruptcy

Declaring bankruptcy is the last resort for someone who is hopelessly in debt. What can bankruptcy do for you?

It eliminates debt: By filing for bankruptcy, either Chapter 7 or 13, most debts will be eliminated.

Creditors will stop calling: By law, creditors must stop all collection activities against a debtor once bankruptcy has been filed.

Bankruptcy disadvantages are:

It hits your credit rating long term: Since a bankruptcy remains on your credit report for ten years, it degrades your credit rating.

Getting new credit may be tougher: Depending on the lender, acquiring credit after a bankruptcy may not be easy and may be costly too.

Which option is best?

Analyze your debt situation carefully. Get advice from a credible, experienced, and competent credit counselor. Credit advisors offer objective advice on both debt consolidation and bankruptcy but, ultimately, the decision is yours to make.