The Basics of Debt Consolidation
Is Debt Consolidation Better Than Bankruptcy?
Debt consolidation is a way to pay off your debts without sacrificing your assets. When you consolidate debts, you take a new loan that has a longer pay period and lower interest rate than your current debts. Typically, this loan is taken from a debt consolidation service, which will extend you credit even when other loan companies might refuse.
Debt consolidation involves taking out a new loan to pay off several older debts.
Once your consolidation is set up, you make one monthly payment to the consolidation company and they pay your creditors, so you no longer have to deal with them. You can consolidate debt through a secured loan (usually secured by equity in your home) or an unsecured loan, where the consolidator simply lends you the money.
You may also be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. However, if you default, you put your home at risk if you have more equity in your home than you can protect with the home exemption allowed by Ohio.
Advantages of Debt Consolidation
- Protects Your Reputation and Credit Rating: Debt consolidation is not a matter of public record. It may show up on your credit report, but it does not typically lower a credit score like filing for bankruptcy does.
- Keep Your Credit: Usually, unless the terms of your loan does not allow it, you can keep your credit cards. However, if you keep running up charges on credit cards, you will be back in a financial hole.
- Simplifies Your Payments: You just have to make one payment for the consolidation loan.
- Lower Interest Rate and Monthly Payment: But be aware of the costs and fees of some loans, as well as tax liability, that could make costs higher.
Disadvantages of Debt Consolidation
Before you leap into debt consolidation, be aware that there are serious disadvantages involved that may mean debt consolidation is a bad idea for you. These include:
- Risk to Property: For loans secured by your home or vehicle, you could lose that property if you default on the consolidation loan.
- Total Costs: Debt consolidation services charge a small monthly fee and extend the repayment period. The total amount of money you spend repaying your debts is likely to be higher than it was before consolidation, even if your monthly fees are lower.
- Tax Consequences: The IRS may consider money you save from debt consolidation as income, which, depending on your income, may mean you pay taxes on it.
- Creditors May End Plans: Consolidation agreements are not typically legally binding, so if creditors change their minds about accepting lower payments, they can end the payment plan.
A Note of Caution: Make sure you thoroughly research the debt consolidation company you are going with to make sure they are a legitimate company. There are fraudulent companies out there who will take your money, pay off some small debts, and then disappear leaving you being sued by creditors for the remaining debt.
While debt consolidation may be helpful in certain situations, for many people bankruptcy can be a better option. Bankruptcy allows you to eliminate or restructure certain debts while under the protection of the federal bankruptcy court. The most common types are Chapter 7 and Chapter 13. It makes sense to examine all the facts with an experienced bankruptcy lawyer to see what is best for your circumstances.
Are you worried about how you will pay your bills and deal with debt collectors? Contact Fesenmyer Law Office at 614-228-4435 (Columbus), 937-222-7472 (Dayton), or 877-654-5297 (Cincinnati) to schedule a free consultation.
What Is Better, Debt Consolidation or Chapter 7 Bankruptcy?
Debt Consolidation vs. Bankruptcy
A Chapter 7 bankruptcy allows you to eliminate many types of debt quickly and receive a fresh start. It can discharge unsecured debts, which include credit cards, medical bills, and installment loans. It stops, prevents, or resolves collections, loan deficiencies, repossessions, wage garnishment, and civil judgments. It can help you eliminate the bills you cannot afford while allowing you to keep assets such as your car and your house. Chapter 7 bankruptcy is often suitable for people with a lot of unsecured debt but not much income. Often referred to as a liquidation bankruptcy, Chapter 7 can allow you to stay in your home while discharging credit card, medical, and other debt.
The bankruptcy process is over in a few months, so you can begin rebuilding credit quickly. Once your unsecured debts are eliminated, you will have little or no debt remaining, and lenders may feel that you will be better able to repay your debts in the future, so your credit situation is likely to improve. You may be able to finance vehicles within months and a home within two years of your bankruptcy discharge.
What Is Better, Debt Consolidation or Chapter 13 Bankruptcy?
With Chapter 13 bankruptcy, you work with the courts to reorganize your assets and consolidate your payments to repay some or all of your debt over a three- to five-year period. It is similar to debt consolidation, except a court is involved in the process. The court determines how much you can afford to pay and how much your creditors will receive. It also applies an automatic stay to your creditors. This prevents them from trying to collect money from you in any way other than the bankruptcy process.
A Chapter 13 bankruptcy may cost you less money over the long run and allow you to pay off your debts in less time than a debt consolidation.
What Are the Advantages and Disadvantages of Filing for Bankruptcy?
Bankruptcy, like debt consolidation, has advantages and disadvantages. You can’t decide which is best without understanding those benefits and drawbacks.
Advantages of Filing for Bankruptcy
- Protection From Creditors: When you file for bankruptcy in Ohio, there is an automatic stay that prohibits most creditors and collectors from engaging in collection activity such as harassing phone calls, lawsuits, garnishments, repossessions, and foreclosures.
- Provides a Fresh Start: Chapter 7 eliminates most unsecured debt such as medical bills and credit cards, and Ohio’s exemptions may allow you to keep much of your property. Chapter 13 lets you repay a portion of your unsecured debts through the court-supervised repayment plan. You typically pay only a percentage of your total debt, and you may be able to save your home from foreclosure and your vehicle from repossession. Through the Chapter 13 repayment plan, you no longer have to deal with creditors as payments go to a trustee who distributes the money.
- Re-Establish Your Credit: The discharge of bankruptcy helps to give you a fresh start. It clears out negative reporting so that you can start to rebuild your credit. Once a debt is discharged through bankruptcy, the default statuses are cleared and the credit score will increase. Lenders are more likely to lend to someone who is not in default on their debt payments.
Disadvantages of Filing for Bankruptcy
- Credit Rating: A bankruptcy initially lowers your credit score and may stay on your credit report for seven to ten years. However, once you receive your bankruptcy discharge, you will have a clean slate, and since there are time limits on filing for bankruptcy again, it may be easier to get credit. In general, a credit score usually increases from 60 to 100+ points a year after the discharge.
- Privacy and Reputation: Your employer may learn about your bankruptcy if you permit it to pull your credit report or if your Chapter 13 plan payments are made through payroll deductions. Also, bankruptcy records are available to others at the federal bankruptcy courthouse and through the federal court system’s PACER service.
The skilled attorney at our law firm will further explain these advantages and disadvantages if you have questions.
Questions About Debt Consolidation vs. Bankruptcy
Call Our Bankruptcy Attorney for Help
You should carefully consider all the facts relating to your situation before deciding on whether debt consolidation or bankruptcy is right for you. The experienced and compassionate Ohio bankruptcy attorney at Fesenmyer Law Office has helped thousands of clients who are struggling with financial problems and will help you find a solution. Take the first step toward debt relief and contact us today for a free initial consultation.
During your consultation, we will evaluate your entire financial situation, explain your options, and walk you through the process.
Contact Fesenmyer Law Office Today
Determining what debt relief option to choose is a big decision. Your actions today could have consequences that last for the rest of your life.
Delaying can only worsen your situation, so call our Ohio bankruptcy attorney today! Call us at 614-228-4435 (Columbus), 937-222-7472 (Dayton), or 877-654-5297 (Cincinnati) for your free consultation so we can determine what debt relief solutions will work best for you.
