Debt consolidation and bankruptcy are two very different considerations for those facing an overwhelming amount of debt. Although each option offers some advantages, each option could also affect your credit rating. However, if you are behind in your bills, your credit rating is already being affected, so taking action is critical. Before taking any action, though, it is necessary to understand all your options.
Debt Consolidation
Credit counseling services are a good source of information about consolidating debt. These agencies have experienced counselors who not only negotiate with your creditors for you but also provide you with sound strategies for managing your money. Those enrolled in such programs are usually required to get on a budget and abide by certain rules.
Debt Consolidation Loans
A debt consolidation loan may be an option for a select few. However, if you are already considering bankruptcy, chances are you may not qualify for a loan or a loan at a reasonable interest rate because you may already be behind with some bills. Still, if you have a large amount of unsecured debt and are keeping up for the time being, this could significantly lower your monthly payments.
Debt Consolidation Considerations
If you are working with a counseling service, remember that creditors still could put notes on your credit report saying that the bills were settled for less than the original amount. This could reflect negatively on your score, but defaulting or bankruptcy would be much worse.
Bankruptcy Types
If you decide bankruptcy may be the proper route for you to take, you generally have two options to consider, Chapter 13 and Chapter 7. Chapter 11 could also be filed, but this is generally reserved only for corporations. Each has its own advantages and disadvantages.
Chapter 7
Chapter 7 is known as the traditional bankruptcy and most severely affects your credit report, because it will be noted for 10 years. It will also affect your ability to get a mortgage and other credit accounts for at least two years. However, it will wipe clean nearly all your debts, allowing you to keep your home and at least one vehicle, if you so choose.
Chapter 13
Although Chapter 13 will also leave a mark on your credit, it will not do so for as long. This type of bankruptcy allows you to reorganize or to restructure your debt so that it is more manageable. In other words, it does almost exactly what a credit counseling service does, but does it under a court order so that both you and your creditors know what is going to happen.
Bankruptcy Considerations
Although it may seem like the easy way out, bankruptcies can affect you in the long run very negatively. Additionally, they are not cheap, and lawyers, knowing that your debts could be canceled or restructured, will likely demand upfront payments. Deciding to pursue a bankruptcy should only be done after carefully considering all other options and discussing your situation with professional financial planners.
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