Bankruptcy Vs. Debt Consolidation: What is the Ideal Option?

bankruptcy Vs. debt consolidation

Entrepreneurship may look very exciting from the outside, but those who are into it know the real sweat and pain that goes into making a business successful. It requires a lot of acquired intelligence to succeed in a business by starting it from scratch. Most of the times, when you are neck deep in debts and financial burdens, you may either enter into bankruptcy Vs. debt consolidation state. These are the two possible avenues that you can consider.

Dealing with one loan is a stressful affair. Just imagine the hassle of dealing with multiple loans and several lenders! If you don’t know how to tackle the situation, it may get worse with time. While trying to figure out ways to deal with debts, you may come across various confusing options. When it comes to running a business without a strict financial discipline, there is a high chance of ending up in bad debts, which may get more complex over time to adversely affect your business.

Both bankruptcy and debt consolidation have advantages and disadvantages. Choosing one will require a clear understanding of the processes and the consequences. Both of these have long and short-term effects to deal with. We will discuss these ones by one to have a better understanding.

Bankruptcy

Declaring bankruptcy may surely affect your credit score as well as your reputation, especially when you are a business person. Those who have filed bankruptcy may find it really challenging to rebuild things from the scratch to gain a sustainable credit for secured loans. They may have to make a lot of adjustments with a highly scaled-down lifestyle, which can be most difficult.

However, bankruptcy may also provide some considerable relief to those who have sunken by enormous levels of un-repairable debts. One may get relieved fully from the dreaded letters and phone calls as soon as bankruptcy gets declared. Further, we will explore a few major advantages and disadvantages of filing bankruptcy.

Advantages of bankruptcy

  • Bankruptcy will help you get rid of the old tax liabilities (three years or above).
  • Nowadays, declaring bankruptcy can help you start with the credit rebuilding process sooner.
  • Bankruptcy will help you by preventing your lenders from getting into any aggressive or adverse collection action.
  • Bankruptcy is considered by many as bravely facing the reality, which can allow one to have a fresh new start.
  • There are many specialized lenders who offer loans on “bad risks” for those who are into bankruptcy.
  • Many of the US states allow exemptions for you to keep most of your possessions by getting them exempted from bankruptcy.

Disadvantages of Bankruptcy

  • Bankruptcy may fully spoil your credit score for time being.
  • Even upon getting bankruptcy, most of the tax debt remains nondischargeable.
  • Bankruptcy may not help you get rid of student loan debt.
  • You may lose all your credit cards.
  • Most people consider bankruptcy as an acceptance of defeat.
  • Bankruptcy may leave your name in the paper as well as in the court records.
  • Bankruptcy will further make it almost impossible for you to get another mortgage.
  • With bankruptcy, you may lose some of your luxury possessions.

Upon filing bankruptcy, you have to explain to a judge how you ended up in a financial mess and, believe me, they have already heard much worse stories than that of yours. You also may have an attorney to evaluate your filing for bankruptcy.

If you are in a really tough financial spot, bankruptcy may be an ideal path for you to start all over again. But, it is vital to be knowledgeable about what it does and does not for you. If not, you can choose to consolidate all your loans to get out of financial troubles.

Debt Consolidation

Getting started with a consolidation loan means availing another higher loan from a lender to assist you with the existing debts. There are many debt consolidation services which work as middlemen between the creditors and debt holders. These services can act as a link between the parties by requesting the creditors for reduced payments and help debtors to get the best possible deals.

Advantages of Consolidation

  • Debt consolidation process may quietly work behind the scenes and help the debt holders to handle their debts in a better manner.
  • The relationship between the debtor and consolidation service may be mostly confidential. So, when compared to bankruptcy, consolidation will not harm your business goodwill and repute.
  • You can get on to a more relaxing and comfortable position by getting rid of all harassing phone calls and other collection practices.
  • Ideal debt consolidation also offers you the benefits of longer repayment periods and lesser interest rates.

Disadvantages of Consolidation

  • The major disadvantage of debt consolidation is that it is only limited to unsecured loans such as credit card debts. You cannot get secured loans like mortgages or car loans consolidated.
  • Sometimes the early repayment penalties of multiple existing long-term loans may outweigh the benefits of debt consolidation process by incurring more charges and fee.

Costs Involved

You should keep in mind that both debt consolidation and filing bankruptcy don’t come for free. Debt consolidation providers are going to charge the processing fee, monthly fee etc. Filing for the process of bankruptcy and employing an attorney etc. also cost a significant sum. So, you have to carefully look into the various incurred costs to make a decision between bankruptcy filing and debt consolidation. Apart from these, there are various other avenues that can help you successfully get rid of debts.

An Expert Verdict

As per the financial experts’ advice, bankruptcy may have to be considered only as a last resort while dealing with debts. Those who are trapped with credit card debts may ideally look into debt consolidation first as it only creates a lesser impact on your credit report. Bankruptcy may be ideal for those who have to deal with larger and more complex debt problems such as repossession and foreclosure etc.