When is Bankruptcy Better than Debt Consolidation?

According to the U.S. Federal Trade Commission (FTC), filing personal bankruptcy is considered the debt management option of last resort. However, the bankruptcy may be a better option than debt consolidations based on people financial situations and risks that comes debt consolidation. In fact, as of 2009 more people are choosing to file bankruptcy over debt consolidation, according to Street Insider, a financial news analysis service.

Bankruptcy Is Not A Loan

However, debt consolidation is. When individuals choose debt consolidation, they are bundling their debts into one loan with a lender. The lender then pays off the debts. Bankruptcy is a legal process that allows people to either reduce or eliminate their debts.

For People Who Want To Keep Property

Unlike bankruptcy, debt consolidation doesn’t provide a way for people to keep their property if creditors are foreclosing or trying to repossess property like homes or cars. In fact, debt consolidation doesn’t cover any secured debts. However, bankruptcy provides people with an automatic stay. This stay stops creditors from starting or continuing debt collection activities. In other words, people facing foreclosure can keep their homes.

For People Who Are Unemployed

The success of debt consolidation depends on repayment. However, if individuals are unemployed or underemployed, debt consolidation can make things worse. Bankruptcy—in particular chapter 7—is the best alternative. It is for people without regular income and allows them to eliminate their debts without repayment.

For People Who Don’t Want To Shift Debt

Debt consolidation is akin to paying debts off twice. First, the new lender pays off creditors then the individuals pays the new lender. Thus, people are shifting debt from many creditors to one creditor then paying the debt. However, bankruptcy provides a way for individuals to automatically eliminate or repay the debt.

For Individuals Who Want To Avoid Risks

With debt consolidation people may put up collateral for the new loan. If they miss payments then they lose their homes. Although some unsecured debt consolidation (that doesn’t require collateral) is available, they come with extremely high interest rates.

Seek Legal Assistance

Bankruptcy attorneys will talk with people and review their current financial situations. Also, they will determine if bankruptcy is right for people.

Think Bankruptcy Might Be for You?