Debt Consolidation vs. Bankruptcy

Excessive debt obligations have been an ongoing problem in this country for generations. The stagnant economy has certainly made it a more widespread issue than in recent decades. More individuals and families are finding themselves under staggering debt with no conceivable way to recover from the magnitude of their obligations. Unfortunately, attempting to hide from creditors and third-party debt collection agencies, and standing by while a tough situation continues to spiral out of control only makes the problem that much more difficult to resolve. A more positive and proactive approach to managing debt, such as debt consolidation, can provide financial and emotional reprieve from the escalating problems that outstanding bills usually cause.

The Bankruptcy Option

Debt consolidation is an effective and very responsible alternative when anyone is forced to handle their debt obligations aggressively. However, filing a petition for bankruptcy is usually the most popular method. A vast majority of the population have no real idea just how harmful declaring bankruptcy can be with regards to their future financial security. Bankruptcy has quite a few drawbacks when compared to a well-designed debt consolidation program.

Loss of Assets
Many of an individual’s assets and property are not protected by state or federal laws. If they file for a Chapter 7 bankruptcy petition, they may be forced to liquidate any property or assets they are not exactly entitled to, such as those pledged as collateral, in order to pay off their creditors.

Credit ratings are affected for years
Filing for any of the various chapters of bankruptcy can damage an individual’s chances or opportunities for qualifying for future credit or loans because it dramatically and negatively affects their credit ratings. A negative credit rating as a result of filing for bankruptcy can remain on their credit reports for up to ten years.

Bankruptcy is filed in a federal court
In order for an individual to come under the protections that bankruptcy allows, they must do so within the federal court system. This also means having to engage the services of a qualified bankruptcy attorney for a substantial fee, along with other filing and credit counseling expenses.

Retirement savings are not automatically protected
Protections provided by filing bankruptcy do not always automatically guarantee the money in an individual’s 401k is exempt, nor any funds up to $1 million in an IRA account. However, any other monetary assets that may have been allocated for the future can be taken by the bankruptcy court to satisfy debts to creditors.

Filing a petition for bankruptcy is certainly one method to try and manage debt. Nevertheless, it is a very extreme measure. But it is not the only avenue to consider.

Debt Consolidation is a Suitable Alternative

A debt consolidation program can allow any individual a viable alternative to eliminate the heavy burden of debt, and provides far more control over their economic situation than filing for bankruptcy can. Debt consolidation programs are designed by taking existing debts and gathering them into a single, far more manageable loan. The debt consolidation company or agency then applies that loan toward all of the individual’s monthly payment obligations, while working with their creditors to negotiate lower interest rates. There are many advantages to using this type of program to effectively manage high debt.

Monthly Payments are Lower
A debt consolidation program can significantly reduce an individual’s total monthly payment amount to provide them the flexibility and security to pay what is owed each month without having to undergo so much financial stress. By using one larger loan to pay down or eliminate a multitude of smaller debts, individuals are then granted much more time to create a workable budget and eventually become more financially stable and responsible. In addition, there is no longer the need to worry about paying on time or managing several different due dates every month.

More Funds are Applied Toward the Principal
Specifically, credit card consolidation loans enable individuals to apply much more of their payment towards debt reduction instead of paying most of it towards the interest. Higher debt usually causes the minimum payment on credit balances to actually be lower than the finance charges being applied. Once this occurs, the credit balance may increase despite the credit card no longer being used. By negotiating and eventually acquiring lower interest rates from an individual’s creditors, a debt consolidation counselor can ensure that their monthly payments are more effective in getting them out of debt more quickly, instead of having them applied toward these higher interest charges.

Credit Rebuilding
Bankruptcy can significantly damage an individual’s credit rating. On the other hand, a debt consolidation program can actually help those scores considerably. These plans guarantee that an individual’s bills will get paid on time, therefore allowing a substantial and measurable improvement in credit scores. Improved credit scores allow much better interest rate availability on future loans and credit needs once they have successfully managed their finances enough to not only get out of debt, but to stay out of debt.