Consolidating Unsecured Debt vs. Filing Bankruptcy

Unsecured debt consolidation is one way to avoid filing for bankruptcy. The process of unsecured debt consolidation occurs when individuals seek to pay off a number of creditors at one time. Typically, the individuals have a tremendous amount of unsecured debt such as credit cards, department charge cards or payday loans. In other words, they have a lot of debt which isn’t backed by collateral. So, creditors can’t take property to satisfy the debt. However, when comparing unsecured debt consolidation to filing bankruptcy, people should understand that there is a difference between the two.

Unsecured Debt Consolidation Means Creditors Are Eliminated

The best part about pursuing unsecured debt consolidation is that people are able to pay various unsecured creditors money all at one time. For instance, an individual with 7 to 10 unsecured creditors can bundle those debts into one new loan. The new lender pays all the creditors off. Thus, instead of paying 7 to 10 creditors, the individual pays just one.

Consolidating Debt Has Many Drawbacks

Even though the creditors are gone, the debt remains—with additional debt. Thus, debt consolidation only moves the money people owe from various creditors to just one. Also, unsecured debt consolidation can come with high interest rates and points to pay. For people choosing to obtain unsecured debt consolidation loans (not backed by collateral) will probably have higher interest rates on the money they owe. In worse scenarios, the combination of debt plus high interest rates can result in higher monthly payments to one lender than monthly payments to all the creditors.

Filing For Bankruptcy Means Reducing or Eliminating Debt

According to the U.S. Federal Trade Commission (FTC), filing personal bankruptcy is generally considered the debt management option of last resort because it can stay people credit reports for approximately 10 years. Nevertheless, filing personal bankruptcy does have advantages. People don’t bundle their creditors into one loan. Under chapter 7 people can discharge all their debts or under chapter 13 can repay their debts in three to five years. Bankruptcy includes both secured and unsecured debt. Thus, if people are behind in their mortgage, they can include it in bankruptcy.

Bankruptcy Offers Legal Protection

When filing bankruptcy, creditors are prohibited from pursuing debt collections, wage garnishment or lawsuits. Unsecured debt consolidation provides no legal protection.