Bankruptcy Debt Consolidation Information

Anyone struggling to make payments on their debt has probably considered getting a debt consolidation loan or filing for bankruptcy. The options for digging yourself out of a bad financial situation are tiered, with debt consolidation loans having the least impact, to debt management plans (which are seen as the last stop before bankruptcy), to bankruptcy itself. Each has its own set of benefits and drawbacks of which you must be aware before committing to one.

Debt Consolidation Loan

A debt consolidation loan pays off your current debts, so you end up making one payment per month instead of multiple payments. To qualify for a debt consolidation loan, you must use some form of collateral, such as your house. Debt consolidation may be risky for those who aren't fully committed to keeping their debt paid off; consumers are often tempted to begin spending on their newly freed credit.

Debt Management Plan

Those who have already defaulted on their accounts may be able to apply for a debt management plan. You may only qualify for a debt management plan if a credit counselor recommends one. The credit counselor then works with your creditors to lower your interest rates and/or your payoff balances. You then make one payment to your credit counseling company each month. The company then pays your creditors. The Federal Trade Commission recommends working with a counselor listed by the Association of Independent Consumer Credit Counseling Agencies or the National Foundation of Credit Counseling, since many fraudulent credit counseling programs exist.

Bankruptcy

Bankruptcy is the last resort for clearing your debt. While it's true that bankruptcy wipes out your debts, it also effectively erases your entire credit history -- which means that you have to start from scratch. Therefore, all employers, landlords and lenders see when they look at your credit report is that you've had to file for bankruptcy. It takes up to 10 years for a bankruptcy to be removed from your credit report.

Considerations

With all of these methods, it may become difficult to obtain new credit. Lenders are the least leery of debt consolidation loans, since they're set up against collateral; however, they may might take the loan as a sign that you were under financial strains after taking on too much credit. Debt management plans signal to lenders that you weren't able to pay back the entirety of what you borrowed, which will weigh heavily against you when trying to obtain new credit down the road. Above all, bankruptcy causes the most problems in qualifying for new credit -- no history means lenders have absolutely nothing to judge your credit worthiness on. Oftentimes, those who file for bankruptcy end up taking out secured credit cards in an attempt to rebuild a credit history.