Overwhelming debt is frightening. Fortunately, there are several options men and women have to resolve this situation and regain their financial footing. Certain individuals find they must file bankruptcy as their situation has become so dire. Others, however, discover a debt consolidation loan will be enough to get them back on track. Understanding the differences between the two is crucial to ensuring you make the right decision for your specific needs and financial situation.
Debt consolidation is a process in which all debts are combined into one financial product. This is typically done by taking out a loan to pay the debts, but other options are offered. For instance, a person might find they wish to enter a debt management program, one that offers credit counseling in conjunction with the loan. One option that may be overlooked is the balance transfer option.
Consumers obtain one credit card with a low balance transfer rate or no interest rate for a specified period of time. All credit card balances are moved to this card to allow for one monthly payment. All offer similar benefits, and you can learn more over at debtconsolidationnearme.com.
The Benefits and Drawbacks of Debt Consolidation
While the process differs based on the debt consolidation process selected, the major benefit is that all will prevent a negative item on the debtor’s credit report. The debt will still be paid, just as one monthly payment instead of many. The main drawback is that it takes time to pay the loan off, and this is dependent on how much the individual owes. In many cases, the interest rate is lower than what the debtor was paying, however, which will reduce the time needed to pay the debt in full.
One thing to keep in mind if this option is selected is new debt should not be taken on until the consolidation loan has been paid in full. This is where many people go wrong. They obtain the loan and then accumulate more debt and find they are back in the same situation that led to taking out the consolidation loan. If you feel this might be a problem for you, it’s best to consider other debt-relief options.
An additional option for consolidating debt is to take out a home equity loan. Nevertheless, many experts recommend that you do not do this. In this situation, you are taking unsecured debt, such as credit card debt, and turning it into secured debt. In the event you cannot make the payments on the home equity loan, the lender may come in and take the home as payment for the debt. This will leave you with debt and no place to live, which is why quite a few are against this option.
Debt consolidation loans do come with some fees. This depends on the consolidation option selected. For instance, a person who chooses the balance transfer option may be charged a fee to transfer the balances from existing cards to the new card obtained for this process. Home equity loans frequently come with application and processing fees among others. Be sure to add in these fees to determine the actual cost of consolidating the debt.
Bankruptcy, in contrast, is ideal for those who want their debt erased quickly. Depending on the bankruptcy option selected, this goal may be easily achieved. This option is good for those who aren’t concerned about the damage this process will do to their credit score. Knowing which type of bankruptcy to file is important when this option is selected.
Chapter 7 bankruptcy erases a person’s debt within a six-month period. Available assets are sold as part of this process, although the legal system does allow for some exemptions. In order to qualify for chapter 7 bankruptcy, a person must pass a means test.
Individuals who don’t pass the means test need to choose chapter 13 bankruptcy. With this option, a repayment plan is developed to address the debt. Debtors find this plan can extend over a five-year period, although this is determined when the plan is initially established. When compared to debt consolidation, the two processes take about the same time in many cases. Nevertheless, chapter 13 bankruptcy is less damaging to the debtor’s credit score than chapter 7 bankruptcy.
The Benefits and Drawbacks of Bankruptcy
Bankruptcy does have a negative impact on the debtor’s credit score. If Chapter 7 bankruptcy is selected, it will remain on the credit report for ten years. Those who choose the chapter 13 option find it remains on the credit report for seven years. What many are surprised to find is the higher your credit score is before the bankruptcy, the more it will drop as a result of choosing this debt-relief option.
Be aware that certain debts are not erased in bankruptcy. For example, a person who owes back child support or has unpaid taxes will find bankruptcy does not eliminate these debts. They will still be owed once the bankruptcy process is complete. Additionally, there are fees that must be paid when a person files for bankruptcy. This includes an administrative fee, a filing fee, credit counseling fees, and more. An attorney may need to be retained to assist with the process, and this must be factored into the total cost as well.
Quite a few are surprised to learn there could be tax implications associated with filing for bankruptcy. A tax refund may be turned over to the trustee as part of the bankruptcy process. Additionally, any debts discharged in the bankruptcy are taxed as income, and the taxpayer needs to account for this when the time comes to file with the IRS.
As you can see, there are benefits and drawbacks to each option. Regardless of which is selected, debt relief is available if you know where to look. If you want help in deciding which is best for your specific situation, don’t hesitate to seek advice. An attorney, for example, can be of assistance at this time, and the same is true of credit counselors. Choose wisely, as your financial future may depend on the outcome.