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Bankruptcy vs. Debt Consolidation

When you are in the midst of major financial distress, almost any solution can seem like a good idea. We encourage you to consider some of these points before seeking debt consolidation or giving up altogether. Talk to Dave Hillier about your options. Your initial consultation is cost and risk free. We can provide an objective, experienced point of view to help you make important decisions about rebuilding your financial life.

Debt Consolidation Service: Costs, Quality, and Guarantees

Debt Consolidation companies cannot offer you any guarantees. If they claim otherwise, be wary. What they offer is negotiation of interest rates, balances and monthly payments for your debts. Creditors are not necessarily obligated to maintain these agreements, and can still sue you or change interest rates. Debt Consolidation can also cause other negative consequences when published on your credit.

Debt consolidation companies usually collect fees up front, ask for monthly fees immediately, and many front-load fees so they get paid whether or not they produce results. Additionally, many consumer credit counselors and Debt consolidation companies are paid by the credit card companies or banks you may already be paying. Debt Consolidation companies are not subject to licensure and regulation is minimal. Some Debt Consolidation companies have gone out of business or have been forced into receivership by the FTC after collecting fees without providing promised services.

Debt Consolidation cannot prevent lawsuits or the enforcement of judgments against you, and does not provide assistance with these procedures if and when they occur. Additionally, these programs may not be able to lower your monthly payments. In some cases, repayment structuring may actually cause monthly payments to increase. Their methods of determining your payment amounts are irregular, inconsistent from company to company, often inadequate and offer no solutions for people who simply cannot afford their debt. All of this bashing of Debt Consolidation companies does not apply to top-quality non-profit counseling agencies, like On-Track here in Asheville.

Filing Bankruptcy provides guarantees and protections under the law. It establishes regulations with which creditors must comply. Bankruptcy is a procedure, not a negotiation. Your plan is based on your ability to pay, not what a debt consolidation employee or creditor decides you can pay based on their assumptions. Bankruptcy can reduce interest rates to 0%, discharge many kinds of debt and can reduce or eliminate aging IRS debt, as well.

If you file Bankruptcy with the guidance of an experienced Bankruptcy attorney, you have someone on your side with a legal and ethical obligation to represent your interests. Your attorney has no bias in favor of credit card companies or banks. He will ensure your rights are protected. Attorneys are trained to understand complex Bankruptcy code and law, and can inform you of your rights and options.

Rebuilding Credit

While both options can have a negative impact on credit score, Debt Consolidation provides none of the guarantees or protections offered under Bankruptcy law. Your credit remains vulnerable during debt consolidation, but the automatic stay of Bankruptcy protects your credit score from further harm during the payment period. You are also unable to use or attain more credit while in a Debt Consolidation plan; not so when you file for Bankruptcy. Many people are able to apply for new credit in under a year after their filing.

Bankruptcy is done all at one time, so you have a clear plan with a simple beginning and ending, while debt consolidation can drag on for years without significantly lowering balances. If you are unable to complete your Debt Consolidation plan or unable to afford it, you lose all of the time you spent using the plan previously. In Bankruptcy, all of that time would have counted toward your recovery.

The Debt Consolidation process can take 6 months to a year for settlements to come in (each one at a different time since creditors are negotiating separately). With the help of an attorney to streamline the process, Bankruptcy covers everything, and gets your discharge in about four months from beginning to end. See the Frequent Questions Section of our site.

Property Protection

Debt Consolidation generally deals with only your unsecured loans, leaving your house and cars vulnerable to repossession by creditors. Bankruptcy covers almost everything (student loans and IRS debts receive special consideration). Some Debt Consolidation programs may involve high-risk home equity loans placing your greatest asset in jeopardy should the plan not work. And, as you recover under these programs, things like paying down your car, inheriting money, getting a tax return or seeing your home increase in value, could make your property subject to seizure by creditors.

In most cases, Bankruptcy allows you to keep your personal property, offers exemptions to protect home equity, protects you from lawsuits and judgments against your possessions, and will not allow creditors to continue to harass you in any way.

Regaining Control

When you undertake debt consolidation, you are entrusting your future to an unknown, legally untrained, third party, and many times, with negative results.

What many debt consolidation companies will not tell you is that some creditors will not deal with debt consolidation or entertain restructuring for customers who pay their bills on time. Creditors often only work with people who are 60 to 90 days late on payments, and have credit histories which are already damaged.

Filing Bankruptcy is voluntary, protects your assets and future creditor actions, and it gives you a realistic chance to rebuild your financial health without fear of further consequences. During Bankruptcy, creditors have to file their claims, and a plan is created or debts are discharged. This plan is based on personal circumstances and considerations in which you can afford within Bankruptcy law guidelines, and is determined by a Means Test which applies to everyone.

The automatic stay offered through Bankruptcy immediately stops and/or prevents harassing phone calls and threatening letters from creditors, as well as any current or future credit related lawsuits against you.

The bottom line is filing Bankruptcy gives you the relief of clearing the slate by dealing with all of your debts at once. It’s not a ‘pick and choose’ process. You regain some power in getting your life back on track, you have a clear plan to recover and succeed, and you have the ability to improve your quality of life. There is an end in sight, and a chance to get off the merry-go-round and move forward.

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