Debt Consolidation vs Bankruptcy

debt consolidation vs bankruptcyBecause so many Arizonans find themselves over their heads in debt without income to cover basic life expenses, we’d like to discuss the two common choices consumers use to escape the debt nightmare: debt consolidation and bankruptcy.

Both will leave undesirable marks on your credit report.  Bankruptcy may cost a couple thousand once, while consolidating may run a couple thousand monthly for several years.  In deciding the most favorable route for your situation, it’s best to weight costs and benefits involved with both.

Do You Want Discretion, Or A Fresh Start?

Candidates for consolidation receive the benefit of discretion throughout the life of their financially troubling situation, meaning bills will show as being paid over time yet all accounts are essentially froze by creditors during this period (if accounts are open and mildly late).   Bankruptcy offers a clean slate, but tattoos your credit report for 7 years using the biggest lender cussword: bankrupt.

Consumers who find themselves overburdened with multiple types of debt find bankruptcy the quickest route to financial fruition.  Since you’re unable to immediately file again, lenders from the auto and credit card industries begin mailing preapproved offers almost immediately when you’ve filed.  However, where personal finances are concerned, discretion may be the better part of valor.  Take this into consideration, but never look at any one situation as being similar to yours as individual mileage always varies.

Click here for more information on bankruptcy issues in Arizona.

Do You Prefer Law, or Order?

Unless you’ll file bankruptcy pro se (without the benefit of counsel) and in forma pauperis (as a poor person) which essentially waives your filing fees,  legal intervention is suggested since bankruptcy attorneys specialize in navigation the U.S. Bankruptcy Code and may provide the sharpest sword during the creditor meetings.  Lawyers can help consumers reaffirm car loans that they’ll faithfully pay beyond discharge while also helping consumers understand the Means Test.  So if you’re the type who wants a complete shield from creditors (and could care less about the seven year credit report ding) and the comfort of legal protection, bankruptcy is the logical choice.

Consolidation companies have sprouted up like wild onions during the last decade alone.  This is because they’re job is simple: call creditors, discuss payment arrangements, slap consolidation company’s cut onto the backend and then go on to the next consumer.  If the company is offering a loan to blanket your debt, consumers get to worry about cross-collateralization of their property should they default on the loan.  These companies are (cough) mandated in terms of what they’re able to say and do, and cannot do much for charged off debt being prepared for heavy outside collection activity.  Those who would rather keep their financial problems “on the DL” and don’t want the dreaded seven year ding, finding a debt consolidation company may prove fruitful.  A thorough side-by-side comparison of today’s bigger players has been compiled here.

The prospect of debt consolidation is an attractive one for cash-strapped consumers who are struggling to make payments on a variety of debt obligations, such as personal debt, credit cards, retail store cards, student loans etc. Debt consolidation works as follows – obtain a loan at a lower interest rate for the total amount of outstanding debt from various sources; pay off all the higher interest-rate debt so that there’s only one (affordable) monthly payment to contend with; and bingo, the promise of a debt-free existence seems within reach. (See Investopedia’s great instructional video on debt consolidation here.)

There are genuine advantages to debt consolidation offered by a legitimate company or financial institution; in fact, individuals can enjoy:

  • a rate of interest that is generally lower than that on credit card and store card debt;
  • the opportunity to prevent further damage to one’s credit;
  • the chance to eliminate debt.

These advantages more than offset the drawbacks of debt consolidation – the risk of falling further into debt unless spending habits are changed; and the risk of losing one’s house if it has been offered up as collateral for a secured line of credit and the consumer is unable to service the consolidated debt.
Unfortunately, a number of unscrupulous companies that prey on vulnerable consumers have given the debt consolidation industry a bad name. Such companies typically charge thousands of dollars in hidden fees and charges, leaving the indebted consumer financially worse off than before and faced with the risk of penalties and a deteriorating credit rating.

As a result, consumer protection agencies such as the U.S. Federal Trade Commission in the U.S. and the Financial Consumer Agency of Canada have repeatedly warned consumers not to be taken in by deceptive marketing practices and tall claims of companies that promise to reduce debt or offer debt relief through debt consolidation or other means.

While it would be preferable to deal with a bank or financial institution for a debt consolidation loan, the reality is that such loans may only be available to people with relatively high credit scores, an otherwise fairly solid financial position and significant income. If you do not fulfill these stringent criteria and are in the market for debt consolidation, experts recommend a few basic tips to ensure you deal with the right company.

  1. Avoid companies that employ high-pressure sales tactics or make unrealistic claims
  2. If a company claims to be a non-profit entity, ensure that it truly is one.
  3. Make sure there are no hidden fees and charges, and avoid companies that ask for substantial fees upfront.
  4. Read the fine print.

The Bottom Line

Debt consolidation can be a useful tool for debt management and reduction, but make sure you are dealing with the right company to help you achieve your objectives.

Bankruptcy, for those who aren’t candidates for consolidation, can wipe your debts away (minus anything like child support, student loans and federal or state taxes) yet should be filed with attorney assistance to avert disaster.

Err on the side of caution if choosing bankruptcy, and file the petition with an expert bankruptcy attorney.