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Debt Consolidation vs Bankruptcy

Which is Best?

A Debt consolidation is simply the process of refinancing your existing debt into a new one. It essentially is trading one death for another. This may be helpful, because you might be able to get a better interest rate and stretch the term out to improve your cash flow. However, you still end up paying all of the debt. Bankruptcy, on the other hand, can reduce the debt, sometimes to zero. Debt consolidation will not harm your credit score as much as bankruptcy will, but you will be paying much longer than it will likely take to rebuild your credit after discharge in bankruptcy. Deciding between debt consolidation vs bankruptcy is a tough, but critical decision.
Chapter 13 Loan Modification

Is Debt Consolidation a Good Idea?

Debt consolidation might be a good idea. If you are not having problems paying your debts and simply want to save some money, lowering your interest with a debt consolidation loan could help. You need to have good credit in order to get good interest rate. Banks lend money at good rates, it seems, only if you really don’t need it. If this is you, then debt consolidation vs bankruptcy decision may favor debt consolidation.

A debt consolidation loan could help your cash flow. If you combine multiple credit card and other debts into the debt consolidation loan, you could get a lower payment, and stretch the loan out. This could lower your monthly payment. There are online calculators to help you determine what you would pay.

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Disadvantage of Debt Consolidation Loan

Bluntly stated, these loans are not very effective tools for debt relief. The actual savings you realize by consolidating your debts is the difference between interest rate on your loan, and the interest rates on the debts you pay off with the loan. There normally is a savings, and it can be as much as 10% or more. But that’s it. That’s the total savings. But, if that’s all you need, it will be better than even filing a Chapter 13, perhaps.

How These Loans Often Go Wrong

The most common problem I’ve seen with these loans is running the credit cards back up again after you pay them down. This is more common than you might think. When you consolidate, you pay cards off but don’t close them. And, you really don’t want to close them, as this will hurt your credit. This is not really a debt consolidation vs bankruptcy factor, but important to your financial recovery. What often happens is the credit cards are too tempting to use again. People then, over time, build up their balances, and end up with the same credit card debt, and also the consolidation loan.

The Most Dangerous Consolidation Loan of All

I’ve seen consolidation loans turn into disasters for my clients. The worst kind of consolidation loan is the HELOC. This is a Home Equity Line Of Credit. This is actually a second mortgage on your home, but the lenders don’t like to scare you with the “M” word. A “MORTGAGE” is scary. But a HELOC sounds less so. Many people who get HELOCs do not understand that they are mortgaging their home.

If you later need to discharge debt in bankruptcy, the HELOC will normally not be able to be discharged, because you have secured it with your home! You HAVE to pay this back. So, whatever you do, please DO NOT GET A HELOC. When faced with debt consolidation vs bankruptcy, avoid the HELOC.

When you’re considering different options for debt relief, it’s helpful to talk with someone who is trained and certified, and has decades of experience in all the different options. Richard West is trained, and certified and experienced in all debt relief options. He’ll make sure you know what not to do, as well.

Call West Law Office for a free consultation. We offer in-office, video and telephone appointments. We’ll help with the debt consolidation vs bankruptcy decision.

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