Debt Consolidation or Bankruptcy: Which is Right for You?

Sometimes it gets to a point where you are unable to pay your bills and are also unable to service your obligations. At this point, the right route to take might be a bit confusing because of the options available. You might have heard of debt consolidation, debt counseling, bankruptcy, and even mortgage modification. But which one is the right fit for you? In this guide, we’ll take a look at the benefits and disadvantages of bankruptcy and debt consolidation to help you make a better choice for your financial well-being.

Definitions

Debt consolidation is a practice that involves obtaining a single loan to cover debts that are older and are demanding on interest. Not only does this strategy give you more time to repay a debt, but it also greatly simplifies things. Your debt is consolidated, leaving you with only one monthly payment, which has lower fees and a narrower interest rate in most cases. However, to qualify for this, you need to have the necessary credit rating and income source to service the payments. The specifics are explained in the Eligibility section below.

Individuals can file 3 different bankruptcies. Chapter 7 bankruptcy is a tool used to help reduce the debt burden by discharging debts that qualify, but there may be assets that needs to be administered to pay your debts. Chapter 13 bankruptcy, on the other hand, helps people reorganize their liabilities to create a repayment plan that is attainable based on their assets and income. Chapter 11 is also a bankruptcy tool which helps people and companies create a payment plan which has its advantages and disadvantages compared to a chapter 13 for individuals.

Impact on Credit

Consolidating your debt can have a negative or positive effect on your credit score. Here, what counts most is the amount you owe and how large the new loan is. Many people choose this step as it can help rebuild your credit score by showing that your old creditors have been paid in full. If, on the other hand, you choose to open new lines of credit and accounts, you might find yourself in a deeper hole than you were in.

When you file for bankruptcy, the record stays on your credit report for up to 10 years. Filing for bankruptcy may lower your FICO score if you are starting with a high FICO score. However, this shouldn’t be a hindrance for long because of the clean slate bankruptcy provides. Experts say if you are careful with your credit post-bankruptcy, you might be eligible for a mortgage in about two to three years after filing.

Eligibility

It is generally difficult to obtain a relatively serviceable debt consolidation loan without a credit score of 650 and above. This score shows that you can repay your debts and in good time. Alternatively, your credit score doesn’t determine the qualification for bankruptcy. However, several terms and conditions apply depending on your income threshold, further determined by the household size and location for chapter 7 bankruptcy. If you don’t qualify for chapter 7, you can use chapter 13 to get some relief. To find out more, reach out to us here at Northeast Ohio Bankruptcy Attorneys by contacting us today.