Debt Consolidation vs Chapter 7
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Debt Consolidation vs. Chapter 7
Credit can help you manage your finances and enjoy a number of benefits, but it can also cause a great deal of trouble if you’re overextended.
For many people, credit is a way to buy and do things they otherwise would not be able to afford. And while the occasional splurge can be overlooked, regularly using credit to make unaffordable purchases is dangerous.
In other cases, credit acts as a lifeline and is the only way someone is able to make ends meet. If you’ve found yourself unexpectedly out of a job or dealing with a medical problem, this might be the case for you.
Regardless whether your current credit situation was of your own making or due to unforeseen circumstances, there’s no denying things can feel pretty unpleasant when you’re having problems. Luckily, it is possible to get your credit issues under control. For some, that simply means tightening the budget a little, but for others, it requires something more drastic.
Resolving Credit Issues
Two of the most common ways people deal with credit problems include consolidation and Chapter 7 bankruptcy. Debt consolidation allows you to combine numerous debts into one, while Chapter 7 bankruptcy eliminates a good portion, if not all, of your debt.
How do you know which choice is best for you?
First, it’s important to keep in mind that each choice has consequences. There can be a number of benefits to filing Chapter 7 or consolidating debt, but each option creates a new financial situation. Determining which option is best for you often means looking at the side effects of each and determining which of those you can handle.
When you consolidate debt, you take out a new loan to pay off your existing debts. This means you’ll be paying just one monthly bill instead of several with varying interest rates each month. Ideally, you’re able to get an interest rate lower than what you have on the loans you’re paying off. And in some cases, the monthly payment on the new loan is lower, so you have more money to work with on a monthly basis.
The downside of consolidating is that it can result in you paying more in the long run, especially if the interest rate isn’t low enough. And if you consolidate into a loan with a low introductory rate, you need to be sure the permanent rate isn’t unreasonable.
But if you’re having trouble making ends meet month to month consolidating can help you manage your budget better. And over time, hopefully, you’ll be able to pay more than the minimum due on the new loan, which will save you in interest.
It’s important to realize that you don’t need to work with a debt consolidation company to handle your debt in this manner. It isn’t necessary to pay a third-party to consolidate debt and you shouldn’t ever stop paying on the loans you owe until you know for a fact the new loan has paid off the debt. Some companies scam you into thinking you’re consolidating, when in reality you are paying them. This means your original lenders will hit you with late fees and penalties, and you run the risk of being sued.
Chapter 7
Chapter 7 bankruptcy allows you to eliminate a good portion of your debt. In most cases, if a loan is unsecured (as is the case with credit cards), it will be discharged in Chapter 7 bankruptcy. This means you are no longer legally obligated to pay it.
Filing for Chapter 7 bankruptcy, in a way, is like debt settlement because the bankruptcy trustee liquidates any assets you own and uses them to pay your creditors. They do not receive the entire amount you owe, but they receive what is available from your bankruptcy estate.
Chapter 7 bankruptcy is a fantastic option for those facing serious financial struggles that see no end in sight. Unfortunately, not everyone qualifies to file for Chapter 7. In order to qualify, you must pass the bankruptcy means test, which looks at your income and the size of your family, and compares it to the median in your area. If you income is higher than the median, you’ll need to look at other options.
It’s also important to realize that Chapter 7 cannot discharge all debts. Medical and credit card debt are usually covered, but most tax debts and student loan debts are not, though there are some exceptions. Child support and alimony payments are also not covered in Chapter 7.
The best thing you can do if you’re weighing your options and you believe Chapter 7 could help you is to speak to a bankruptcy expert. He or she can administer the means test to determine if you qualify and review with you the pros and cons of bankruptcy and other options.
You should understand that bankruptcy is not a simple process and it is not a decision to be taken lightly. It’s a legal process and your case goes through the court, which means it is a matter of public record. It’s also something that will remain on your credit report for many years, impacting not only your credit score, but also your ability to borrow money in the future. You also won’t be able to file for Chapter 7 bankruptcy again for many years, so if you hit a financial snag again in the future your options will be limited. And many people are surprised to learn that it cost money to file – sometimes more than $1000, so if your current situation is too desperate, it might not be an option.
Despite the downside of bankruptcy, there are many instances in which it is the best option. Many view it as a last resort, and unfortunately, that means they wait far longer than they should to file. Others fail to consider it at all because of the social stigma attached to it. It is possible that bankruptcy can provide you the fresh start you need and you should view it objectively and consider how it could improve your situation.
If you’d like to discuss your financial situation or you need help deciding if debt consolidation or Chapter 7 is better for you, we can help. If you’d like to know more or you want more information about debt or bankruptcy, contact us at 1.800.220.4318.