Choosing between debt consolidation and bankruptcy might seem like making a choice between bad or worse.
However, depending on which path you choose, you may experience some financial freedom whether in the short or long term. Below are some critical aspects that you might want to know.
Debt Consolidation: The Basics
Debt consolidation is the process of taking a new loan to cover your old loans. It might not seem like you are doing much with this, but the process might actually get you an overall lower interest rate.
Let’s say, for example, that you have multiple loans with different interest rates – all of which add a lot to your debt. Now, if you take a bigger loan to cover all your other loans, you will still have to pay, but now, instead of three varying interest rates, you will have only one. This can often help you save money and get out of debt faster.
However, the disadvantage is that you will need a fairly good credit score in order to qualify for good interest rates, and you may need to find a co-signer you trust. If your credit score does not look great, you might have consolidated your loans into one single loan, but with a higher interest rate.
On the other hand, the advantage is that if all goes well, it will help you build your credit back up in the long run and save you money. If you can make payments on time and lower your overall monthly debt payments, your path to financial freedom will be complete much sooner.
Bankruptcy: How Does It Work?
Debt consolidation helps individuals organize their payment methods better – but bankruptcy is there to help you in the event that you can no longer pay your debt back. Bankruptcy is able to take away the consumer debt, and make it more manageable through different means:
· Chapter 7: Liquidation – When individuals are filing for liquidation, the ones in debt will have to sell some of their belongings in order to pay off the debt. Most of the person’s debts are eliminated – with only a few exceptions, such as student loans, child support, and tax obligations.
· Chapter 13: Repayment – When filing for a repayment type of bankruptcy, the borrower is able to repay their creditor over a course of 3-5 years. The debt will be removed, as long as the one who files for bankruptcy will stick to the repayment plan.
Both debt consolidation and bankruptcy filing can help you get out of debt – but remember that while bankruptcy may be less stressful on your finances, it will deliver a stronger blow on your credit. Bankruptcy should only be an option if you really are desperate and have no way of paying off your debt.