Bankruptcy is a tough choice to make. On the one hand, it gives you an opportunity for a fresh start. But it comes at a price: a damaging effect on your credit score. Alternatively, if you are concerned about salvaging your credit, debt consolidation is another available option.
Bankruptcy
All states adhere to the U.S. Bankruptcy Code. Whether you file a bankruptcy petition for Chapter 7 or Chapter 13, all states interpret the law the same. The main difference is the qualifying median household income applied in a means test to determine your eligibility for filing bankruptcy. The means test compares your household income to the median household income of similar size in Pennsylvania. If your income is too high, you may not qualify for bankruptcy liquidation under Chapter 7 but may qualify for Chapter 13, which re-works your debts with creditors.
Automatic Stay of Protection
A bankruptcy petition gives you automatic stay of protection from creditors, which suspend all collections efforts on their part. The automatic stay of protection bars a creditor from contacting you. During the time, the court requires that you submit financial records and receive credit counseling as part of the evaluation process.
Debt Consolidation
Debt consolidation, debt settlement and counseling fall under the umbrella of credit counseling. Debt consolidation refers to taking out a large loan at a lower interest rate to pay off your high-interest debts. The best example of this is taking out a home equity loan with a low fixed rate to pay off your credit cards. In contrast, debt settlement involves settling your debt obligation for less than the full amount that you owe. There a number of agencies that provides credit counseling services to Pennsylvania residents. You'll have to do some homework to determine which agency is right for you. According to the Pennsylvania Attorney General's Office, avoid debt counselors who charge excessive fees, make hard sales pitches and pay employees by commission.
Considerations
Bankruptcy may be a likely option if you've experienced a dramatic loss of income and don't expect any future income gains. In contrast, you have to pay off a debt consolidation loan. Therefore, a loss of income leaves you back where you started if you took out a debt consolidation loan. In addition, if you have your debts discharged in Chapter 7, you are essentially "free and clear." If you don't qualify for Chapter 7 but fall under Chapter 13, you are basically reorganizing your debts with creditors. Debt consolidation leaves you with a larger loan. Another option is debt settlement which reduces your principal balance to as low as your creditor is willing to accept. But you must stick to the terms once you reach a settlement agreement. You can also have a credit counselor negotiate an interest rate reduction which reduces your monthly payments.
Credit Impact
Most likely, your credit score has already taken a hit if financial circumstances have brought you to the brink of bankruptcy. However, a bankruptcy is devastating to your credit score. The impact is hard to quantify because it depends on what your score was to begin before you filed. The credit rating agencies report bankruptcy information for up 10 years. On the other hand, debt consolidation salvages your credit score to some extent. Debts that are consolidated show as paid off on your credit report. However, the credit rating agencies also take into consideration the amount of debt you owe. So, a larger loan will have a negative effect on your score.
0 comments:
Post a Comment