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Debt Consolidation vs. Bankruptcy: Which is Your Best Option?

On Behalf of | Mar 3, 2022 | Bankruptcy Basics, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy

Are you in debt and unable to pay your bills? If so, it’s probably time to learn about what options are available for you to get rid of your debt.

Bankruptcy and Debt Consolidation are two of the most common ways people get rid of their debt. We are often asked, “which is better- debt consolidation or bankruptcy?” The general answer is that it depends upon your individual situation.

This article will explain the differences between bankruptcy and debt consolidation and the pros and cons of each.

Contact our experienced debt relief and bankruptcy attorneys for a free consultation to decide which would be your best option: bankruptcy or debt consolidation. We are happy to help you figure out how to get rid of your crushing debt.

How Are Debt Consolidation and Bankruptcy Different?

If you are reading this, you probably have debt that you can’t afford to pay.
If you are considering debt consolidation or bankruptcy, please know that you are not alone. If your bills are causing you stress and anxiety do yourself a favor and learn what options you might have to get rid of the debt and get a fresh start.

The two options we will discuss are: debt consolidation or bankruptcy, which is better?

When you consolidate your debts, you’re reorganizing many debts into one loan or credit card. There are also debt consolidation companies that will put you on a payment plan to repay your debts.

Bankruptcy, on the other hand, is a legal proceeding which eliminates or restructures your debt under Federal Law. Chapter 7 and Chapter 13 are the most common types of bankruptcy used by individuals.

Debt Consolidation vs Bankruptcy

What is Debt Consolidation?

When you file a personal bankruptcy, the automatic stay is immediately effective. This means that all collection activity against you The goal of debt consolidation is to consolidate unpaid bills into one payment. Debt consolidation can be done on your own or by hiring a debt consolidation company.

You can do it on your own by taking out a new larger loan or a new credit card and then use it to pay off your current bills such as credit cards, personal loans and medical bills. Alternatively, some people take out home equity loans to consolidate their debt.

There are also debt consolidation companies that will negotiate with creditors and put you into a repayment plan. These companies take a monthly payment from you and then pay your creditors. Payments to debt consolidation companies don’t always include all of your debt. These types of arrangements are voluntary with credit card companies. They also usually don’t include medical debt and other types of loans.

Advantages of Debt Consolidation vs Bankruptcy

– Instead of dealing with many monthly bills, that have different interest rates and due dates, you only have to make one monthly payment, often with a lower interest rate
– If you can consolidate with a lower interest rate you might be able to pay off your debt more quickly
– If you consolidate the debt yourself, you keep access to credit and credit cards
– It is not public knowledge

Disadvantages of Debt Consolidation vs Bankruptcy

– You might not qualify for a lower interest rate, especially if you don’t have a good credit score
– You could still fall behind on payment
– It often provides an extended repayment term so you may be in debt longer
– Lenders may charge fees such as balance transfer, loan origination or closing fees.
– People often run up new debt on the credit cards they have used to consolidate their bills.
– Debt consolidation does not mean debt elimination.

What is Bankruptcy?

There are various types of bankruptcy, but Chapter 7 and Chapter 13 are
the two used most by individuals and small businesses.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a way that people can eliminate most kinds of
debts. Student loans, most tax debts and alimony and support are some of the debts not eliminated in a Chapter 7 bankruptcy.

No payments are made to creditors and most people get to keep everything they own, including their car.

From start to finish a Chapter 7 bankruptcy takes only about three to four months.
Chapter 7 is usually the right type of bankruptcy for people who have a large amount of unsecured debt and don’t have many assets or equity in property such as a house.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is also called a “wage earner reorganization plan.” In Chapter 13, all of your debts are reorganized into a plan to repay your creditors over 3 to 5 years. In a Chapter 13 bankruptcy, a Plan is filed showing how you will repay your debts over 3 to 5 year. Often you only have to pay some of what you owe to your Creditors as it depends upon your income and your assets.

When you finish your Plan, any remaining debt is eliminated (discharged).
The Court must approve the Plan. For the Court to approve the Plan, you must have enough disposable income to afford to make the monthly Plan payments.

There are also limits to the amount of debt you can have and still be able to file Chapter 13 Bankruptcy. Currently you cannot file a Chapter 13 Bankruptcy if you have more than $419,275.00 in unsecured debt (debts not secured by property including medical bills and most credit card debt) and $1,257,850 in secured debt (such as mortgage or car payments)

Read our article “How Does the Bankruptcy Process in New Jersey Work” for more information.

Advantages of Filing for Bankruptcy vs. Debt Consolidation

Chapter 7 Bankruptcy Advantages

– Stops Creditor Actions including garnishments, lawsuits
– No more harassing Creditor phone calls
– Eliminates most debt
– Gives you a fresh start
– The automatic stay stops collections
– Quick process-lasts only about 3 to 6 months

Chapter 13 Bankruptcy Advantages

– Can help you save your home from foreclosure
– Your debt is eliminated after you finish your Plan
– You often only pay back a small portion of your unsecured debt
– Harassing creditor phone calls will stop
– The automatic stay stops creditor collections

Disadvantages of Filing Bankruptcy vs. Debt Consolidation

– Bankruptcy stays on your credit report for up to 10 years after filing
– Bankruptcy records are public
– In a Chapter 13, you cannot get new credit without Court permission.

Contact Us to Learn How to Get Rid of Your Debt

If you have questions regarding the best strategy for obtaining debt relief, let us help. We are experienced in handling a variety of bankruptcy and debt issues. Our offices are conveniently located in Maplewood, New Jersey. Please call us at 973-323-2953 or online to schedule your free initial consultation today.

We are proudly designated as a debt relief agency by an Act of Congress. We have proudly assisted consumers in filing for Bankruptcy Relief for over 30 years. The information on this website and blogs is for general information purposes only. Nothing should be taken as legal advice for any individual case or situation.