Debt Consolidation vs. Bankruptcy – Are They the Same?
Sometimes one person’s debt management strategy is not the right one for another person. This is especially true for debt consolidation and bankruptcy. The two are both valuable tools that are designed to get a person debt free. However, both have differences designed to get people out of debt in alternative ways.
What is debt consolidation?
Debt consolidation allows a debtor to combine many debts into a single stream that will be repaid. For instance, let’s say a debtor has outstanding payments on multiple cards. They have rent on one credit card, a medical visit on another, and still owe on an emergency car repair. They can merge all the balances into a single monthly payment.
Consolidation involves getting a loan to deal with debts. The loan can come in the form of a secured loan or unsecured loan. A secured loan is a loan that must have collateral attached to it. If a debtor wants to make payments on debt, they must promise collateral to the bank that issued the loan. Collateral is something that is comparable in worth to the loan, such as a car, home, or property. If the debtor defaults on so many payments, the lender can seize the collateral and sell it to satisfy the loan.
An unsecured loan does not have collateral attached to it, but can come with its set of risks. Unsecured loans often have a higher interest rate, as there is far more risk attached to it for the bank. A secured lender may be able to seize a piece of land in satisfaction of its debt. However, interest rates extended under a secured loan are better for the debtor.
How is that different from filing for bankruptcy?
The goal of debt consolidation is to get a debtor on a simpler monthly payment schedule while reducing their interest rates. Through consolidation, they can pay off creditors, then handle repaying their loan(s). This simplifies the process to one lending institution and usually under more favorable terms.
Bankruptcy can lower the amount owed to creditors. Consolidation gets a debtor on a monthly plan to pay off a loan that they paid to creditors. The debtor still owes the same amount of money if they were given a loan that was the same as their debt.
Filing for Chapter 13 or Chapter 7 bankruptcy can get rid of any debts that are dischargeable debts. Dischargeable debts include personal loans, along with medical bills, utility, or credit card debts. If a debtor qualifies for bankruptcy, these debts are eliminated. Creditors cannot ask for any payment.
If a debtor is unable to afford any payments at all, Chapter 7 may be an option. Although Chapter 7 is a liquidating procedure for selling a debtor’s non-exempt assets, the typical Chapter 7 debtor can protect their home and most, if not all their personal property. This can get rid of a large chunk of debt unlike consolidation, which needs complete debt payment. Chapter 7 can work towards ending debt in as little as three months.
Filing for bankruptcy can stop creditors from certain litigation. Declaring bankruptcy in a court will make creditors stop action on any lawsuits or collection actions such as garnishments, repossessions, etc.
Which one is better?
It depends on a debtor’s circumstances. If you have read this and still need options what to do, contact the bankruptcy attorneys at Acosta Law. Our team is ready to answer questions you may have, starting with your free consultation. At Acosta Law, you will have your initial consultation with an actual lawyer who will help you understand all your options and legal rights tailored to your particular set of circumstances.