What Is the Difference Between Bankruptcy and Debt Consolidation?

If you are struggling with debts you are unable to pay, you may have several options for getting rid of those debts. Two options that you might research include bankruptcy and debt consolidation. Many people discount the bankruptcy option because they believe bankruptcy is expensive and ruins their credit rating forever. However, that is just a bankruptcy myth. Speaking with a Georgia bankruptcy lawyer can help you decide which bankruptcy option is best for you.

In this article, we give you some information for bankruptcy vs. debt consolidation to get you started on your research.

What Are The Pros And Cons Of Debt Consolidation?

Before we discuss a few of the pros and cons of debt consolidation, let’s look at the process. Most individuals consolidate their unsecured debts (i.e. credit cards, medical bills, personal loans, etc.) into one monthly payment. However, before they can consolidate the debt, they must have money to pay each account in full. Therefore, some people take out a new unsecured loan large enough to pay all the debts off, or they may borrow against their home.

Some individuals may attempt to consolidate debt by working with a debt consolidation company. The company negotiates payments with creditors intended to lower the person’s monthly debt obligation. The person pays the company, and the company pays the individual creditors.
Some of the pros of debt consolidation include:

  • One monthly payment
  • The payment may be lower than the combined payments, BUT that is not guaranteed
  • The interest rate may lower, BUT that is not guaranteed

Some cons of debt consolidation include:

  • If you borrow money for the debt consolidation, you are not getting rid of debt. If you could not afford to make the payments before the consolidation, you will likely continue to struggle with debt payments after the consolidation.
  • If you borrow money against your home, you are risking your home. The mortgage company will foreclose the loan if you fail to pay the mortgage payments.
  • Debt consolidation companies can charge high fees for their services. There are no guarantees that your creditors will negotiate the debt and you may pay more in interest in the long-term. Your creditors may also choose to file a debt collection lawsuit at any time during the consolidation.
  • Debt consolidation companies have very little regulation to oversee their conduct and business tactics.

Depending on your financial situation, there could be several other disadvantages of debt consolidation that a Georgia bankruptcy lawyer can review with you in detail during a consultation.

What Are The Pros And Cons Of Bankruptcy?

By contrast, a bankruptcy filing can get rid of your unsecured debts once and for all for pennies on the dollar or nothing at all, depending on the chapter of bankruptcy you file. Bankruptcy also allows you to get rid of your debts while protecting your assets and property, including your home, retirement accounts, and government benefits.

Your creditors do not have a choice but to work within the bankruptcy court. They cannot “opt out” of bankruptcy without court approval, and there are very few reasons a judge would allow a creditor to modify the automatic stay. You are protected by the automatic stay, which prevents creditors from taking further actions to collect debts without court approval.

Filing for bankruptcy relief will improve your credit rating faster than debt consolidation by getting rid of the debts quickly. Many people can see an improvement in their credit score within a few months of filing their bankruptcy case, especially when they work to keep the rest of their bills paid on time and other debts low.

ARE YOU READY TO DISCUSS A CHAPTER 7 OR CHAPTER 13 CASE WITH A GEORGIA BANKRUPTCY LAWYER?

There are many more advantages of filing bankruptcy that a Georgia bankruptcy lawyer can explain once the lawyer reviews your specific financial situation. The above advantages merely compare some of the differences between debt consolidation and bankruptcy.

Before deciding to use debt consolidation, it may be worth your time to meet with a bankruptcy attorney to discuss whether bankruptcy might be a better option for getting out of debt. Schedule a consult with an experienced Georgia bankruptcy attorney to determine your options.