Debt Consolidation Vs Bankruptcy
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Debt Consolidation vs Bankruptcy
If you are struggling with a substantial amount of debt, it’s important to explore all options available to you. Debt consolidation is one alternative to bankruptcy in which you consolidate debts you owe to reduce your monthly payments and interest charges. While this may sound like a great deal, we urge you to be careful if you decide to work with a company advertising debt consolidation services.
What is Debt Consolidation?
Debt consolidation is advertised as a way to save money, reduce the burden of your debt, and protect your credit score. With debt consolidation, you are reorganizing several debts into a single loan with one payment. Debt consolidation may be done with an unsecured or secured loan.
There are some advantages to considering debt consolidation:
- Protect your credit. If your credit is good now, debt consolidation can help you protect your credit rating because debt consolidation is not public, unlike bankruptcy. Debt consolidation may show up on your credit report as a loan, but it usually does not lower your credit score, unlike bankruptcy.
- Maintain access to credit. Unless it is prohibited in your debt consolidation agreement, you will be able to keep your credit cards and access to credit.
- Easy management of your debt. You will have a single payment with one interest rate.
- Lower monthly payment and interest. Your debts will all be under a single monthly payment that is easier to manage with a lower interest rate.
There are also some serious drawbacks to debt consolidation. To begin with, you may end up paying a great deal of money in hidden fees, especially working with a debt relief company, and there may be tax liabilities. You can lose your home or other property if your debt consolidation loan is secured and you default, and it’s possible for a lender to cross-collateralized to take other property if you default. Be sure you understand all costs associated with debt consolidation as the hidden costs of the plan may mean you end up paying more in the long run. If creditors forgive any debt you owe, it can be reported to the IRS and you will owe income taxes on the forgiven debt.
Pros and Cons of Bankruptcy
Bankruptcy offers the opportunity to restructure or discharge (eliminate) most debts while gaining protection from debt collectors through the automatic stay court injunction. Chapter 7 allows you to eliminate most types of debt whereas Chapter 13 restructures your debts under a 3-5 year repayment plan, after which remaining debt is discharged.
Like debt consolidation, Chapter 13 allows you to repay your creditors with one payment, but the interest rate on your debts is capped by law and likely much lower than any debt consolidation loan. Debt dismissed after you complete the repayment plan will not incur any income tax issues like forgiven debt in debt consolidation, either.
Bankruptcy also offers:
- Protection from your creditors under the automatic stay. This will stop not only harassing phone calls but also lawsuits, repossession, foreclosure, and wage garnishments.
- You get a fresh start financially after wiping out unsecured debts.
Still, bankruptcy will impact your credit rating and remain on your credit file for 10 years. The good news is bankruptcy can actually improve your credit score if it’s already very low and you will be able to reestablish credit as soon as your bankruptcy is discharged. You may also need to surrender luxury and nonessential belongings in a Chapter 7 bankruptcy.
Contact a Las Vegas Bankruptcy Attorney
Not sure which debt relief solution is right for your situation? A bankruptcy lawyer in Las Vegas can help you understand your options and determine if bankruptcy is really the best choice or if an alternative solution offers more benefits in your situation. Contact Vegas BK today for a free consultation with an experienced Nevada bankruptcy attorney to discuss your case.