When facing a financial crisis, any legal avenue to relief is something to be considered. Those who find themselves in dire straits often feel that they have to choose between one of two options: debt consolidation and bankruptcy.

Both of these solutions will typically result in financial breathing room, and both can get you back on track financially. But they are designed for two different situations. In general, debt consolidation is often attempted before resorting to personal bankruptcy, but this is not always the case. Assessing each solution’s pros and cons will help determine which option is the most appropriate for your specific circumstance. 

Debt Consolidation

Some bills, especially credit cards and high-interest loans, can be crippling due to interest accrual. Minimum monthly payments consist almost entirely of interest, never lowering the balance of the principal and never allowing the borrower to make progress repaying debt. An individual can combine multiple monthly bills into a single, more manageable payment in the debt consolidation process.

The new single payment often has a lower interest rate and allows for more of the total payment to be applied to the principal amount. This means more cash is available to pay down the principal loan amount – not just constantly pay interest. 

After debt consolidation, most people can resume using their credit cards if necessary. Also, unlike bankruptcy, debt consolidation is not considered public record, so privacy is protected. 

Still, debt consolidation has its drawbacks. For instance, it isn’t easy to get a low-interest rate if you do not have a good credit score – which most candidates for this solution do not have. In fact, given the rate offered, you may end up paying more over the long run. Additionally, once consolidation has taken place, it can still take many years to pay down or pay off the total debt.

Keep in mind: if you used your home or car as collateral, you could lose them if you do not keep up with payments as promised. 

Personal Bankruptcy (Chapter 7) 

There are many benefits to bankruptcy versus debt consolidation. First and foremost, you may be able to completely eliminate unsecured debts such as credit cards and medical expenses. 

Bankruptcy also halts the collections efforts of your debtors, meaning that harassing phone calls and letters will cease, providing great emotional relief. Bankruptcy can stop foreclosures, repossessions, and wage garnishments. Unlike debt consolidation – where you may be paying off those debts for many years – your fresh start begins immediately. You can start rebuilding your credit right away. 

Before you decide that bankruptcy is too good to pass up, remember that there are restrictions to this solution as well. 

Bankruptcy will not clear many types of debt, including alimony, child support, student loans, and tax arrears. You may be required to give up luxury items, such as expensive cars, to pay off your debt. 

While bankruptcy does relieve many of your debts quickly, the bankruptcy record will remain on your credit report for 7-10 years. The bankruptcy is also public record, meaning that anyone can access the information.  

Which is Right for You? 

Clearly, there are benefits and drawbacks to both solutions. It is recommended that those seeking a financial reset seek the advice of an experienced bankruptcy attorney to explore all of their options in more depth. An attorney can also help you avoid the potential pitfalls inherent in any financial relief structure. For more information on Sarasota bankruptcy or debt consolidation, call the offices of Richard V. Ellis today. We are here to help.