Debt Consolidation Loans vs. Filing Bankruptcy

Debt consolidation loans and filing bankruptcy are diverse options with potentially different outcomes. Debt consolidation loans and bankruptcy are debt management options. However, with debt consolidation loans individuals usually use their secured property such as homes to pay off debt. Usually, these loans are home equity lines of credit, also called a second mortgage.

Debt Consolidation Means Paying Creditors

When individuals take out debt consolidation loans they are swapping one form of debt for another. Typically, people bundle all their debt such as credit card, payday loans and department store debt into one new loan. Then the lenders, who provide the loans to the individuals, pay off the entire debt.

People Benefit From Debt Consolidation Loans

For people who are constantly receiving harassing telephone calls or letters from creditors, debt consolidation loans are a welcomed relief because they are paid. In addition, the debt consolidation loans usually extend people’s repayment time and provide lower monthly payments. The loans also accompany lower interest rates than individuals have with their various accounts.

Debt Consolidation Loans Can Result in Losses

Even though creditors are paid, individuals still the debt—just to someone else. This creates a major disadvantage of debt consolidation loans. People who choose these loans are placing their secured property on the line. Second mortgages come with fees and points in addition to monthly payments. So, if they miss payments the lenders can start foreclosure proceedings and take their homes.

Bankruptcy May Be A Good Option If People Are Too Much in Debt

People filing personal bankruptcy can also stop creditors’ harassing phone calls and letters. Unlike debt consolidation loans, bankruptcy can stop lawsuits, foreclosure and wage garnishments. Also, when filing bankruptcy individuals aren’t putting their homes on the line.

Two Bankruptcy Options

A chapter 7 bankruptcy helps people eliminate debt without repaying creditors. However a chapter 13 bankruptcy allows people to repay creditors over a period of 36 to 60 months. Typically, there are repayment plans created which indicates how much money they will pay the bankruptcy courts each month. The bankruptcy court sends the money to the creditors.

Seek Legal Help When Considering Debt Consolidation Loans Verses Bankruptcy

Debt consolidation and bankruptcy can be confusing and scary. However, individuals who seek legal advice can take the confusion and fear out of the decision. Lawyers can advise people which choice is best for their particular financial situation.

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