Both bankruptcy and debt consolidation have benefits and disadvantages. Before you choose, you should be aware of the process involved and the long-term effects of each.
Financial problems can happen to even the most well-intentioned people. Making financial decisions when you are hurting can lead to costly mistakes, so make sure you are well-informed before you take a step that seems like an easy way out but winds up taking you deeper into debt. That is why we offer a free consultation to evaluate your entire financial situation – your income, your debts and your goals — and see what solutions are right for you.
Is Debt Consolidation Better Than Bankruptcy?
Debt consolidation involves taking out a new loan to pay off several older debts. The idea is to have a lower interest rate and longer period to pay off the new debt than you had for the old ones. You start by contacting a debt consolidation service, which becomes the middleman between you and your creditors and negotiates reduced payments.
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
- It 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.
- You keep your credit.Usually, unless the terms of your loan do 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.
- Has lower interest rate and monthly payment.But be aware of costs and fees of some loans, as well as tax liability, that could actually make costs higher.
Why is Debt Consolidation a Bad Idea?
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.
- Hidden costs.Debt consolidation services charge a small monthly fee, primarily for administrative costs. Costs and fees of some loans, as well as tax liability, could actually make total costs higher in the long run. So can extending the repayment period.
- 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 mind about accepting lower payments, they can end the payment plan.
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 individual circumstances.
What is Better, Debt Consolidation or Chapter 7 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.
There are Ohio bankruptcy exemptions that you are allowed to keep even when filing for bankruptcy. Assets that are exempt are outside the reach of creditors when you’re filing bankruptcy. You can find a list of exemptions at Ohio Revised Code Section 2329.66 | Exempted interests and rights.
Be aware that there are some types of debts that are not dischargeable in bankruptcy, including:
- Child support
- Student loans (except in rare cases)
- Some taxes
- Debt incurred through fraud
- Financial penalties imposed for DUI arrests.
You will still have to pay these debts after your bankruptcy is discharged, but you should be better able to handle them once your unsecured debt is eliminated.
What is Better, Debt Consolidation or Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy allows you to reorganize assets and consolidate your payments to avoid fees and fines and repay some or all of your debt affordably over a three- to five-year period. If you successfully complete the court-approved payment plan, the debts covered by the plan are discharged.
Chapter 13 helps take control back from your creditors that are foreclosing on your home or repossessing your vehicle that you want to keep. Once you successfully complete the repayment plan, the remaining eligible debt is discharged. You will also get relief from harassment by creditors, who must stop all collection activity during the term of repayment.
Chapter 13 bankruptcy may be your best choice if you have more equity in secured assets than you can protect with Ohio bankruptcy exemptions, or if your income is too high to qualify for Chapter 7. To file Chapter 13 bankruptcy you must have a regular source of income and enough disposable income to meet your payment plan.
What are Advantages and Disadvantages of Filing for Bankruptcy?
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 a 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 actually 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.
Questions about Debt Consolidation vs. Bankruptcy
Call Our Bankruptcy Attorneys for Help
The bottom line is that you should carefully consider all the facts relating to your individual situation before deciding on whether debt consolidation or bankruptcy is right for you. The experienced and compassionate Ohio bankruptcy attorneys at Fensenmyer Cousino Weinzimmer know what it is like to struggle 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 and determine whether bankruptcy or debt consolidation is the best fit for you. We will make sure you are aware of all your options and will walk you through the process.
Delaying can only worsen your situation, so call the Ohio bankruptcy attorneys today! Call one of our conveniently located office branches 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.