Managing debt can be a daunting task, especially today when prices continue to rise, and money doesn’t go as far as it once did. Two common ways to tackle crippling debt are with a debt consolidation loan and bankruptcy. Each method provides unique benefits and drawbacks. Understanding the difference between them can help an individual make informed choices concerning their finances. In this article, the Danville, IN bankruptcy attorney, Chris Arrington, will discuss the differences between debt consolidation and bankruptcy.
What is debt consolidation?
Debt consolidation is a financial tactic that involves combining some or all of your debts into a single loan or repayment plan. Debt consolidation loans are offered by lending companies to simplify the process of repayment, and hopefully secure a lower interest rate at the same time.
Types of debt consolidation include:
- Debt consolidation loans
- Balance transfer credit cards
- Home equity loans
Debt consolidation can offer a borrower several advantages. These include:
- Simplified payment scheme – Combining multiple debts into one reduces the number of monthly payments which makes it easier to manage your finances.
- Lower interest rates – Consolidation loans typically have lower interest rate compared to credit cards and other high-interest debts.
- Improved credit score – Making timely payments on your consolidation loan can positively impact your credit score over time.
However, debt consolidation does have some disadvantages. The foremost disadvantage may be that they are difficult to secure. Debt consolidation lenders may not offer a borrower a loan to refinance their credit. You have to qualify for a debt consolidation loan, and those heavily in debt may not qualify. Other drawbacks include:
- Extended repayment periods
- Fees and costs
- Risk of default
What is bankruptcy?
Bankruptcy is a legal vehicle that provides relief to those who are unable to repay their debts. Bankruptcy involves either discharging the debts completely (Chapter 7) or creating a repayment plan under the protection of the bankruptcy court (Chapter 13). Bankruptcy offers debtors a way to get a fresh start financially.
Types of bankruptcy include:
- Chapter 7 – Liquidation bankruptcy. Unsecured debts are completely discharged.
- Chapter 13 – Reorganization bankruptcy. Chapter 13 is good at managing secured debts, mortgages, and car loans.
- Chapter 11 – Mostly for businesses. It works like Chapter 13 bankruptcy but does not have caps on the amount of money you owe.
Bankruptcy has several benefits. These include:
- Immediate relief from debt – Bankruptcy has an automatic stay that prevents creditors from taking direct action against you while your bankruptcy is pending.
- Debt discharge in Chapter 7 – You can completely wipe out unsecured debt in Chapter 7.
- Structured repayment of debts in Chapter 13 – Typically, you do not have to repay all of your unsecured debts, but you will have to repay some.
The biggest drawback of bankruptcy is that your credit score will take a significant hit. Other drawbacks include:
- Bankruptcy filings are a matter of public record
- Legal and administrative fees can add to your financial stress
Talk to a Danville, IN, Bankruptcy Attorney Today
Chris Arrington represents the interests of debtors in bankruptcy filings in Indiana. Call our office today to schedule an appointment, and we can begin discussing your next steps right away.