Considering Debt Consolidation? Is Bankruptcy a Better Choice?

If you are struggling with debt, you need to understand the difference between a bankruptcy filing and debt consolidation to understand which is best for you.

Consumer debt, including credit cards, lines of credit, student loans and more, is at an all-time high in America. Unfortunately, many of the people who carry that debt have found themselves in over their heads, unable to make progress towards clearing it. This is due to many factors, among them our country's recent economic downturn (which caused widespread job losses and layoffs), poor budgeting, overspending, the increasing costs of medical care and more.

Regardless of the reasons why, you may find yourself struggling to pay your debts. Attempting to cover expenses could leave you in the situation of facing repossession or foreclosure, dealing with wage garnishments, unable to buy groceries and dealing with threats of utility shut-offs. There could also be harassing phone calls, letters, texts and emails from one or more creditors causing you additional stress. If this sounds familiar, you may have considered attempting to consolidate your debts or you may have thought about filing for personal Chapter 7 or Chapter 13 bankruptcy. Now you wonder which is best for your unique situation.

Debt consolidation or settlement

Debt consolidation is a process by which the debtor works with a credit counselor or counseling agency to renegotiate debt into a single monthly payment. The "new" debt amount typically has a lower interest rate and monthly than the original debt, and is paid directly to the credit counselor instead of the individual creditors. The counselor then disperses payment to creditors.

This may sound like an attractive option to many people facing insurmountable debt, but it definitely has drawbacks. First and foremost, the majority of debt consolidation and debt settlement companies charge for their services. This may actually end up costing the debtor more money in the long run since this fee is tacked on to the monthly payment amount (which means less money goes toward the principal of the debt). Second, participation in debt consolidation repayment plans is voluntary, and some creditors aren't willing to participate.

In addition, debt consolidation or renegotiation sometimes only results in a lower interest rate or monthly payment for a short time, after which the original interest rate or payment will resume, which could leave the debtor in the same unstable financial position again. Finally, debt consolidation repayment plans can drag on for years, seemingly with no end in sight, all while the debtor is contractually obligated to continue making payments.

Bankruptcy: a light at the end of the tunnel

A better option for many people is to seek Chapter 13 bankruptcy protection. A Chapter 13 bankruptcy will allow the debtor to protect his or her assets (including the family home and vehicle) while still paying down debt in a manageable way. In Chapter 13, eligible debt is rolled into a single monthly payment that the debtor makes for a set time, somewhere between three and five years. At the end of the repayment period, remaining debt is discharged, leaving the debtor with a fresh financial start. During a Chapter 13 repayment plan, all money goes to the underlying debt, without the need to pay additional monthly fees to a third party, and participation by the creditors is required by law.

If you are dealing with unmanageable debt, you may think you have no choice and no options. Fortunately, that isn't the case. By contacting Ben Sissman, Attorney at Law, you can learn about how a bankruptcy filing can give you the fresh financial start you need. Call the firm today at 901-730-4958 (toll-free at 866-788-0394) for more information.