According to Debt.org, Americans are drowning in debt. On average each average, each household with a credit card is carrying more than $15,000 in credit card debt. With such types of large amounts of debt piling up, dealing with it can be confusing and considering all of the options that are available make it even more overwhelming. Facing this amount of debt will lead some people to begin considering a solution. Two of the most popular solutions are bankruptcy and debt consolidation. However, in order to choose one over the other it requires that you understand the process that is involved with each one and the long term effects they offer.
Facts about Debt Consolidation and Bankruptcy
According to Investopedia, debt consolidation is the combining of several unsecured debts into a single new loan that is more favorable. Starting with debt consolidation means that you have to first find and contact a service offering this. A debt consolidation service works as a type of middleman between the creditors and you. The service will contact your creditors, requesting lower payments on your behalf so that the debt can begin to be repaid.
On the other hand, when you file for bankruptcy, you will be initiating a legal process where you will have the creditors blocked from your finances as you work to reestablish yourself in regards to your finances. A Chapter 7 bankruptcy will require that you liquidate all but just a few assets, such as your work and home related assets , see here for more information on Chapter 7 bankruptcy.. If you file for a Chapter 13, you will begin the process of reorganizing your assets and pay off of your debts within a period of three to five years.
Benefits of the Services
The most appealing benefit of debt consolidation is discretion. These services work in a quiet manner and behind the scenes in order to help debtors get a handle on the debt they have. Since the relationship between you and the consolidations service is confidential, the debt consolidation service will never reveal the activities to the owner of the debt employers, potential employers and the debt consolidation process will not ever appear on a your credit report.
Bankruptcy offers the advantage of a completely clean slate. The owner of the debt will begin to work through the debts, without having to worry about any calls from collections agencies or continuing to get bills from their creditors. Read more here on bankruptcy myths and facts.
Disadvantages of the Services
The disadvantages of debt consolidation include the limitations to the work that a debt consolidator is able to do. These services work with various unsecured loans, such as your credit cards. They are not able to assist with any type of secured loans, such as car payments or mortgages. If you are unable to make your mortgage payment, then the debt consolidation service will not be able to help.
The main disadvantage of filing for bankruptcy is that it is public and it can have a severe impact on your credit report. Additionally, the fact that you file bankruptcy will stay on your credit report for up to a decade.
Costs of the Services
A main consideration that you have to make when considering both bankruptcy and debt consolidation is that these services are not free. The debt consolidation services are mainly not nonprofit organizations, which means they will charge a monthly fee, which is typically the administrative costs in order to work with you. Go here for a an article on the fees you can expect to pay.
A bankruptcy will also cost money and in order to file you have to have a lawyer, who will also require payment. Prior to making this decision, you need to carefully consider the costs associated with both.
The fact remains, if you are dealing with a large debt issue, bankruptcy is going to be the best option. This includes repossession and foreclosure, since the filing will block your creditors from being able to claim a right to your assets. Always consider the options carefully to determine what best fits your needs.