The Difference Between Debt Consolidation and Bankruptcy

While many people are familiar with the bankruptcy process, debt consolidation is also a unique process. Debt consolidation involves combining debts into one, more manageable debt. Not only does debt consolidation simplify the repayment process for individuals, it also reduces monthly payment and interest rates. Many individuals confuse debt consolidation with debt settlement, which involves a person paying an amount lower than the total amount that is owed. Bankruptcy, however, follows a distinct process from debt consolidation. In Chapter 7 bankruptcy a person sells property to creditors to pay off debts, while in Chapter 13 bankruptcy a repayment or reorganization will be arranged with creditors. Deciding on bankruptcy or debt consolidation depends on a person’s financial goals.

Advantages to Filing for Bankruptcy

One of the largest advantages of filing bankruptcy is that it offers greater protection against creditors because an “automatic stay” is placed that prevents creditors from obtaining money. An automatic stay also prevents foreclosure, repossession, and shutting off utilities due to nonpayment. Bankruptcy also offers the advantage of clearing a person’s debts, which means that the process lifts financial difficulties from a person. After eliminating these debts, a person can then begin to rebuild their credit and move on with their life.

Disadvantages of Bankruptcy

There are some advantages of bankruptcy as well as several downsides. Filing for bankruptcy will temporarily lower a person’s credit score. After a bankruptcy discharge is granted, however, a person will have a clear record. Additionally, with some types of bankruptcy, a person might be required to surrender certain possessions. Lastly, there is a risk that a person’s employer will learn about the bankruptcy and the stigma of filing for bankruptcy can significantly impact the life of an individual.

Advantages to Debt Consolidation

There are some distinct advantages to debt consolidation. Debt consolidation simplifies the process through which a person pays bills. As a result of this single payment, there is often some cost saving associated with the process. Because the debt consolidation process is confidential, the service performing the debt consolidation will not disclose this activity to a person’s employer. As a result, debt consolidation offers privacy in a way that bankruptcy simply does not.

Disadvantages to Debt Consolidation

Unlike bankruptcy, however, debt consolidation does not result in an automatic stay. Debt consolidation does not create as significant an impact on a person’s credit score, which means that a person’s credit score will remain damaged and a person will not have the option to begin improving their financial reputation. If a person decides to file for debt consolidation, there is also a risk that Internal Revenue Service (IRS) will view money that is saved by debt consolidation as income that can be taxed.

Contact a Knowledgeable Bankruptcy Attorney

Because the bankruptcy process is particularly complex, many individuals require the assistance of seasoned legal counsel to navigate the various obstacles that arise in the process. There are unique considerations in deciding whether to file for Chapter 7 bankruptcy, Chapter 13 bankruptcy, or debt consolidation and attorney Jim A Lyon can help you weigh the various options and decide which option is best for your chosen goals.