Wilmoth Law Blog
Can Bankruptcy Be Better Than Debt Consolidation?
Bankruptcy should theoretically be the option of last resort after you have explored all other ways of better managing your debt situation. You may find yourself with no other alternatives for getting out of debt or making it easier to pay what you owe as it comes due. Then, you may need to seek bankruptcy protection as the first step to securing your financial future. Nevertheless, there are certain trade-offs and consequences that you must be aware of prior to making the decision to file for bankruptcy vs debt consolidation.
What Is Debt Consolidation and How Can It Help?
“Debt consolidation” involves taking multiple credit accounts and rolling them into one larger loan. The benefit of debt consolidation is that you may be able to seek more favorable credit terms, such as a lower interest rate. You may also find it more manageable to pay one creditor as opposed to dealing with several.
Debt consolidation is a new loan that you must take out from a different creditor, who will pay off your existing accounts. It may make sense for you to pursue debt consolidation, but you must find a creditor who is willing to work with you when you are in a distressed financial situation. Some people find it advantageous to at least try consolidation before filing for bankruptcy.
What you need to be extremely wary of is who you may deal with in an attempt to consolidate your debt. There are dubious companies that promise debt consolidation, but they are really charging you a large amount of money that you do not have to pay for services that you can get from a bankruptcy lawyer. You should hire one professional who has deep knowledge of both potential processes and who owes you certain fiduciary duties to achieve the most reasonable and cost-effective outcome for your situation.
Debt Consolidation vs Bankruptcy
You may either not be able to find a creditor who is either willing to work with you or able to offer you terms that are advantageous enough for you to pursue this option. Alternatively, your financial situation may be so dire that consolidation may not really help because you cannot make payments on any new loan. Further, you may be able to seek bankruptcy protection even if you are not behind on your payments, but you may do so proactively to better manage your financial situation.
In that event, you may consider filing for bankruptcy protection under Chapter 7 or 13. If you pursue the former option, you may be eligible for discharge of certain unsecured debts. The price of filing for “Chapter 7 bankruptcy” is that you will need to surrender property that is not subject to exemptions under Arkansas law. There will also be a lasting effect on your credit because bankruptcy will stay on your record for seven years.
“Chapter 13 bankruptcy” may be another option that is available to you. Chapter 13 bankruptcy functions much in the way that debt consolidation would. You would propose a reorganization plan that allows you to make one payment on your debts. Further, you receive three to five years to make these payments.
So long as you keep up with your own personal reorganization plan, you may have debts discharged at the conclusion of the Chapter 13 bankruptcy process. Then, you may not need to pay an exorbitant interest rate to a debt consolidation company because you are not taking out a new loan. Unsecured debt does not continue to accrue new interest once you have entered Chapter 13 bankruptcy.
Contact a Fayetteville Bankruptcy Lawyer at Wilmoth Law Firm if You Have Questions About Your Financial Situation
A Fayetteville bankruptcy lawyer at Wilmoth Law Firm can help you assess your financial options when you find yourself buried in debt. We will take a proactive approach to your situation and help explain your options. To schedule a free consultation, contact us online or call today at 479-443-8080. Located in Fayetteville, Arkansas, we gladly serve clients in the surrounding areas.