Whether it may be for a new business venture, new home or for the daily routine bills, most of us have an unpaid loan or debt lurking on our financial stability. Therefore, in case you are unable to pay the debt, you need to consider and study every available option and avoid making any quick decisions. In such cases, bankruptcy and debt consolidation are two options that you can opt for. Let’s study them closely, so you can choose the best. Bankruptcy and debt consolidation vary largely in risks, costs, and complexity.
In Bankruptcy usually, the debtor files a petition when he is not able to repay loans. In such cases, all his assets are evaluated and used to repay part of outstanding debts. A petition is rarely filed by the creditor. A petition can be filed under Chapter 7 (liquidation) or Chapter 13(repayment). According to Chapter 7, a borrower may have to sell his assets in order to repay the debts. In Chapter 13 court sanctions a new repayment plan in which borrower agrees to pay the debts in the time period of 3 to 5 years. Debts like education loans, child support, alimony, and tax obligations, are not eligible for bankruptcy.
When you opt for debt consolidation, you combine all the debts into one. A new credit or loan is used to repay previous debts. This allows you to manage your monthly payments since you have to pay for one single loan in place of multiple debts. Usually, debt consolidation includes credit card loans, personal loans, home loans, etc. As many loans are combined into consolidation debt, it has more favorable terms like low-interest rates and a reduced number of bills.
With debt consolidation, your credit score may take a deep as you opt for new credit. But gradually your credit score is going to improve when you make timely payments on the new loan. Balances on debts may be reduced or paid off altogether and new debt will be added in a credit report. On the other hand, bankruptcy will have an adverse effect on your credit score as long as it stays on credit report. In this case, the bankruptcy report will be erased from credit card after 7 years from the date of filing.
The process of debt consolidation may take a few months to complete while the process of bankruptcy may vary from few months to 3-5 years for completion.
For debt consolidation, you may have to pay interest on the new loan which varies largely according to the loan type. Some loans may charge loan credit insurance, prepayment fee, loan origination cost, etc. Credit card companies can charge some amount to make balance transfers. In case of bankruptcy, you may have to pay various fees like attorney fee, filing fee, trustee fee, administrative fee, post, and pre-counseling courses fee, etc.
There are no tax consequences when you opt for debt consolidation. On the contrary in case of bankruptcy, if you are eligible for a tax refund, your tax refund may be delayed or handed over to the trustee. If the discharged debt is considered as taxable income, you may have to pay tax on it when the time arrives.
Hence, we can safely assume that debt consolidation can aid us from our assets being taken over and saving us from being bankrupt.