24 Jul Why Bankruptcy Is Better Than Debt Settlement or Consolidation
A lot of times people ask whether debt consolidation is better than bankruptcy. You should be aware that most of the time debt consolidation is not the best for your situation. While the idea of paying the debt consolidation company once a month to take care of all your bills sounds good, it is not the fastest way in eliminating your debts.
I was employed by an 80 years old woman who entered a debt consolidation in 2009. The agreement with the debt consolidation company is that she will pay $900 a month for 60 months and her debt of $47000 will be paid off. After paying religiously for three years she still has a balance of $15000. At this point in time she cannot pay the $900 anymore because her income has been reduce. Can you imagine an 80 year old woman still working to pay for her credit card? By entering into debt consolidation she has no saving for her retirement. Her credit score went worse because for the last three years she was in debt consolidation which means she is in default on her original debt. She said it is not too late to file bankruptcy because she can still enjoy its benefits from now on. The moral of the story is do not ever enter into debt consolidation or debt settlement because you will just waste your money and opportunities. If you are already 57 years old, you should eliminate all your debts or you will have no money for your retirement.
Question: What is the difference between Bankruptcy (Chapter 7 and Chapter 13) and Debt Consolidation?
Answer: Debt Consolidation generally repays creditors back over five years with interest and even penalties for missed payments. Meanwhile, when you have a lot of debt and are behind on payments your credit is getting destroyed each and every month you are in default.
In a Chapter 7 bankruptcy, you will not have to pay back any of your credit cards, medical bills, or other unsecured debts.
In a Chapter 13 bankruptcy case, you are allowed to repay your unsecured debt to the extent you are able to do so. Additionally, if you have fallen behind on a mortgage, auto loan, or any other secured debt where you have used an asset as collateral, you will be given the chance to catch up on those missed payments without accruing interest or penalties in order to save the asset from foreclosure or repossession.
Question: Can I improve my credit rating after if I consider debt consolidation?
Answer: No. Entering a debt repayment plan or consolidation program will only harm your credit score for as long as you are in the program, whereas in Chapter 7 bankruptcy, it allows you to discharge your debts in less than 4 months and start rebuilding your credit. Most consolidation or repayment programs will harm your credit more each month until you finish paying off the debts.
Question: Should I stay away from debt consolidation firms?
Answer: Yes. Debt consolidation firms actually made things worse for many because there a substantial number of people in debt consolidation who ended up filing bankruptcy after a few months of entering into debt consolidation program. As the saying goes buyers beware! These firms will tell you anything you want to hear, will drop big names you know, will promise you the moon, will pretend to be working hard for you and will do anything for you to get your money. They will tell you that debt consolidation is a good option because it’s better for your credit rating (which is the reverse). They will tell you that this is a more cost effective way to pay your debts in full (again, how can you pay your debt if you are bankrupt). What they will not tell you is that not all creditors participate or settle (they file a lawsuit to collect your debt and you are left alone). They will not tell you that any forgiven debt is subject to income tax.
Note: This is not a legal advice. Our Law Firm has successfully helped clients in filing for bankruptcy for the last 13 years.