Medical bills, credit cards, car payments, home mortgages: they all add up to mounting debt. If you’re unemployed or facing income interruption, such as lost income due to the Coronavirus, you have options for alleviating your debt load. Today’s blog from Groce & DeArmon, P.C. explains the pros and cons of debt consolidation versus bankruptcy.
Related Post: Pros and Cons of Chapter 7 Bankruptcy
What is debt consolidation?
Debt consolidation means you combine multiple debt payments into one single loan payment each month. You still owe the debts, and you still need to pay off the loan. There are advantages and disadvantages to this strategy.
Pros of Debt Consolidation
One monthly payment. You only have one monthly payment to keep track of, instead of dealing with multiple payments and creditors.
Minimize fees. Debt consolidation into a new loan may reduce or eliminate fees from the other loans.
Possibly lower payments and interest rates. Sometimes, lenders may reduce their loan amounts and payments if your debt consolidation loan happens via a nonprofit agency, such as a debt counseling agency. The agency will negotiate with lenders to try to get lower payments and interest rates. Lenders can claim their lower payments as a donation to a 501(c)3 nonprofit on their income taxes.
New debt on credit report. On your credit report, debt consolidation shows up as having paid your older debts in full, while the new loan appears as a new line of credit.
Cons of Debt Consolidation
Loan qualifications. You still have to qualify for a debt consolidation loan, which may be difficult if you’re already facing mounting bills.
Longer debt period. You’ll be in debt longer with a debt consolidation loan. Individually, you might have been able to pay off a car loan in six months, or some credit cards in three months. However, debt consolidation loans may take anywhere from two to five years to pay off, depending on the terms of the agreement.
You still owe. Your loan payments may be lower, but you still owe the debt. If you get behind on a debt consolidation loan, you still face the same consequences as you did before the loan.
What is bankruptcy?
Bankruptcy either eliminates or consolidates certain debts into one loan, depending on the type of bankruptcy you file. Chapter 7 eliminates certain debts entirely. Chapter 13 reorganizes your debt to make it more manageable.
Pros of Bankruptcy
Elimination of debts. Chapter 7 eliminates many types of debt permanently. Creditors can no longer come after you for debts discharged in this way. Chapter 13 bankruptcy normally takes three to five years to complete.
Reduction of your monthly payments. Chapter 13 bankruptcy reorganizes your debts to make them more manageable. This is usually a better option for people who have enough income to keep making payments.
Fresh start. Bankruptcy gives you a fresh start with your credit. You can slowly build up your credit on your terms rather than dealing with creditors who may harass you. Bankruptcy places an automatic stay in the debt collection process, meaning creditors must cease and desist collecting the debt from the time you file.
Keep your property. Chapter 13 bankruptcy allows you to keep your property, if you can maintain the payments under the reorganization of your debt.
Cons of Bankruptcy
You may lose some property. Bankruptcy may lead to losing your home, vehicle, or other property.
Your credit takes a hit. A bankruptcy filing may stay on your credit report for up to 10 years. Creditors may be unwilling to loan money to you for a while.
Related Post: The Difference Between Chapter 7 and Chapter 13 Bankruptcy
Call Groce & DeArmon P.C. About Bankruptcy Protection
Debt consolidation or bankruptcy — which is right for you? Your first consultation is always free at Groce & DeArmon. We can discuss your unique situation and help you decide which course of action is right for you. Contact Groce & DeArmon, P.C. or call toll-free 1-800-640-3706 in Missouri or 417-862-3706 for more details.