There are a lot of options out there for getting some relief from your debt. Listen to the radio long enough or watch some television and there inevitably will be a debt consolidation company offering to settle your debts for less and consolidate them together into an easy payment. You also will hear from the bankruptcy attorneys, who offer to help you maximize how much debt you can discharge and how much property you can keep in a bankruptcy filing. So what to do, both offer to take care of your debt, and who really wants to file for bankruptcy? Here is a short examination of the pros and cons of each, Bankruptcy and Debt Consolidation.
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First debt consolidation. Lets start with the pros.
1) No bankruptcy. You are not filing bankruptcy. Lets face it, bankruptcy has its cons which will be examined below, and there is a strong social stigma associated with it. People are embarrassed to file bankruptcy. Beyond the social reasons not to file are the financial. There is a benefit to your short term future credit if you avoid bankruptcy. So for many individuals just avoiding a bankruptcy is reason enough to go with debt consolidation. If it works.
2) Keeping property. This is important depending on what you own and how nice it is. Many people filing chapter 7 bankruptcies are what is considered no asset cases. Meaning that with bankruptcy exemptions and other timing options of filing the bankruptcy petition they keep ALL their property and do not lose a thing in a bankruptcy filing. Lets face it though many of these people do not have much which is why they get to keep it all, but you might be surprised as to how much you can keep in a bankruptcy. If you have a lot of nice things though, filing bankruptcy might mean getting rid of them, and that, for some, is unthinkable.
3) Your credit score. That all important credit score now affects everything from how much you pay for car insurance to whether or not you get offered that great job you went out for. Avoiding bankruptcy, especially in the short term will do wonders here. However, many people considering a debt consolidation already have terrible credit, a bankruptcy might not be able to worsen it.
4) Could be wonderful. When it works, it can work great. You get a great deal from the creditors, you pay off the debt for less than it is worth, you are free and clear and have avoided bankruptcy, and the future credit problems that bankruptcy can bring.
And now the cons to debt consolidation.
1) Taxes!! I put this first because many people do not realize this, but any amount of debt you are forgiven in the debt consolidation process is considered taxable income. That is right, prepare for the possibility of a big tax bill at the end of the year.
2) The price. Debt consolidation can be costly, many times much more than a bankruptcy attorney would charge to represent you in a bankruptcy. This does not mean that it is not worth it sometimes, but that will depend on all the factors of an individual case. How much exactly is being saved versus the costs of going through the process.
3) The time. The debt consolidation process can take awhile. Just think it through, you or your debt consolidation team must get all your creditors to the table, or at least most of them to make it worth it. Then they are all going to have to agree to some sort of deal where they may take less money in exchange for fast and guaranteed payment. This can be difficult or maybe impossible depending on how many creditors there are and how disposed they might be to making or not making any sort of deal. The timing here is important, especially for people who may be facing imminent foreclosures, repossessions, or garnishments. While negotiations drag on, property you depend on to make those future payments may be being taken from you, like your car.
4) Could go badly. The result of a debt consolidation might be to leave you burdened with a lot of debt that still has to be paid back over a significant period of time. Depending on your situation, debt consolidation might be one of the big steps on your way to a bankruptcy. This does happen and is unfortunate because all that money paid to the debt consolidation company is money not well spent. Remember that the creditors in this situation have no obligation to accept the debt consolidation plan. The plan really only is as valuable as the creditors allow it to be.
Now, lets look at some of the pros as far as a bankruptcy is concerned.
1) The fresh start. You get all the debt taken care of, and you are setup with a fresh start and opportunity to remake your financial life. There really is nothing else like it, not even close. Being able to walk away from all that bad luck, or those not so good decisions is powerful stuff. There is no tax burden for the unpaid debts, there is nothing you have to look back on.
2) Very quick relief. Although you may not get your discharge for a few months in a chapter 7 and a few years in a chapter 13, the automatic stay arises immediately and forces your creditors to wait, stop all collection efforts, all lawsuits against you, all garnishments, repossessions, or foreclosures. This is very powerful and again there is nothing else like it. You can even prevent your utilities from getting turned off, or get your utilities turned back on. Immediate, quick relief, can be very important.
3) Relatively cheap. Costs to hire a bankruptcy attorney can vary widely and every case is different and some more expensive than others. That being said many are surprised to hear that while not cheap in and of itself, relative to other options bankruptcy is fairly affordable. You will have to check the prices in your are and with the particular attorney you want to hire. Again prices are going to vary.
4) Very reliable. Bankruptcy just works, it is the law, and it is used often. A competent bankruptcy attorney can minimize the property loss to their client while maximizing the debt discharged, and if bankruptcy cannot help you they will be able to tell you, and not waste your time and money. Compared to a debt consolidation agency, who may or may not be able to make that great deal happen between you and your creditors, bankruptcy is a reliable option.
Now the Cons to bankruptcy.
1) The stigma. There is a social cost to filing bankruptcy, no getting around it. People may think lower of you because of filing. These are people who do not understand, and may never, because they will never struggle at all financially. Unfortunately, or fortunately, these people are everywhere and you may have to put up with their attitudes about your bankruptcy.
2) The property loss. You may have to lose property. For some that property might be significant either in dollar value or sentiment. Many bankruptcy filers do not have to part with any property, and there is always a chapter 13 for those who qualify, but not everyone qualifies for a reorganization under a chapter 13. Remember though, the property that is exempt from being taken in a bankruptcy is significant, check your applicable exemptions to find out more.
3) The credit score. Your credit will get worse if it is possible for it to get worse. In a chapter 7 the bankruptcy will be on your record for 10 years, for a chapter 13, it will be 7 years. You will probably be able to get credit, but you will not get great terms and it may take some persistence on your part. This is definitely one of the bigger prices you pay for getting rid of all that debt.
4) Availability. Bankruptcy is complex and is a specialized area of legal practice. Some individuals try and do it on their own. This is not recommended. There are many pitfalls that can ruin your chances for a discharge, and could even hurt you further. Even with an attorney, filing bankruptcy takes a bit of work. You have to go through your entire financial life and past. There is a lot of financial documentation that has to be collected and filed correctly, and while an attorney can help with that, there is still a burden on the person filing to dig that info up. Then there are the people who just, for one reason or another, cannot file bankruptcy. Filing a bankruptcy petition is not available to everyone, whether it is a recent past bankruptcy, or some other reason that makes filing impossible, there are many who would benefit but cannot be helped by bankruptcy.
So there you have it, not a comprehensive analysis by any means, but there is a list of some of the more pressing issues regarding the differences between Bankruptcy and Debt Consolidation and some pros and cons of each.
DISCLAIMERS: Ohio law governing attorneys and attorney advertisements require me to advise that this article is an "ADVERTISEMENT ONLY" and is not legal advice, is intended for general informational purposes only, is directed to the general public, and is not directed at any particular person, group of persons, or entity.
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