Bankruptcy vs. Debt Consolidation

When you have bills that you cannot afford to pay each month, you may feel overwhelmed by debt. It may seem as if the more you try to catch up your bills, you become further behind and deeper in debt.

A friend or family member may suggest debt consolidation as a solution to your financial problems. Another person may suggest filing personal bankruptcy to get rid of debts. How do you know whether bankruptcy or debt consolidation is the best option to resolve your problems?

Before you do anything, contact Leinart Law Firm for a free consultation with a high-quality bankruptcy lawyer. It is important to learn about all options for getting out of debt before you do anything. Until you’re able to schedule your consultation, please read on to learn the basics about how to consolidate debt as well as the pros and cons of bankruptcy. We’ll begin with debt consolidation.

What is Debt Consolidation?

You can accomplish debt consolidation in at least three different ways. Each option for consolidating debt has pros and cons that you should consider before choosing how to consolidate debt. Some types of credit consolidation that you may choose include settlement loans, debt consolidation companies, and personal bankruptcy.

How Does Debt Consolidation Work with a Settlement Loan?

To settle your debts, you must first obtain a loan or equity line to fund the settlement offers. Once you have funds that you can access quickly, you offer your creditors a percentage of the amount owed on each account to settle the debt.

A creditor may accept your offer, decline to negotiate a debt settlement or make a counteroffer. You must be careful not to offer more than you can afford to pay on each account. If the creditor agrees to a settlement, you must pay the lump sum payment to the creditor within a short period. The creditor will apply the payment to the debt and “write off” the remaining balance on the account.

Some debt settlement pros and cons you should consider include:

  • Your creditors are not required to work with you to settle debts for less than you owe. Therefore, you could have several creditors that continue to pursue legal action to collect the full amount owed on the accounts.
  • The amount that the creditor “writes off” is reported to the IRS. You will receive a 1099 form from the creditor. You must report the amount of debt “written off” as income on your tax return, thereby increasing the amount you owe in taxes for that tax year.
  • The write-offs are reported on your credit reports.
  • You may pay a percentage to settle your debts. However, when it comes to debt settlement vs bankruptcy, you usually pay much more to settle the debts than if you file a Chapter 13 repayment plan.

Should I Consolidate My Debt with a Debt Consolidation Company?

Using a debt consolidation company may sound tempting, especially when a company representative promises to get rid of your debt by consolidating your debts into a lower monthly payment.

In some cases, a representative may tell potential customers that the company can convince creditors to lower interest rates and negotiate settlements; however, this may not be true.

Some debt consolidation company pros and cons to consider include:

  • A debt consolidation company charges a monthly fee for its services. The monthly fee is deducted from the payment you make each month and can be very costly.
  • Creditors are not required to work with debt consolidation companies. Even if a creditor agrees to the terms proposed by the company, the creditor continues to report past due payments and other adverse information to the credit reporting agencies.
  • Creditors working with a debt consolidation firm can decide to file a collection lawsuit or take other legal actions to collect the debt even though the creditor has been working with the company and accepting payments.
  • Although unlikely, you may have a lower monthly payment for consolidated debts, however one of the differences between debt consolidation vs bankruptcy is that in bankruptcy you do not pay interest on unsecured debts. In fact, most people do not even pay back any unsecured debt at all. You can pay thousands of dollars in interest over the term of a debt consolidation agreement.

Debt Relief vs Bankruptcy

When you choose from the various debt solutions available to you, you should keep in mind the filing personal bankruptcy is a true form of debt relief. A bankruptcy case is a legal form of debt relief that is available to individuals to give them a fresh start free from the burden of debt.

When you compare the pros and cons of bankruptcy with the pros and cons of debt consolidation, filing a Chapter 13 to consolidate debt usually gives you more benefits than a settlement loan or an agreement with a debt consolidation company.

Many people fear the consequences of filing for bankruptcy. However, we want to point out these benefits of filing Chapter 13 to consolidate debts:

  • Creditors must participate in the bankruptcy. Creditors are not allowed to “opt out” of a bankruptcy case without court approval.
  • You do not pay interest on unsecured debts in your Chapter 13 case.
  • In most cases, debtors pay pennies on the dollar to get rid of most, if not all, unsecured debts.
  • You may also be eligible to lower your car payments and interest rate through a Chapter 13 repayment plan.
  • Creditors cannot take any actions to collect debts, including repossessions, home foreclosures, or collection lawsuits without court approval.
  • Some debtors can get rid of a second mortgage by filing Chapter 13.

Do You Want More Information from a Texas Bankruptcy Attorney?

The above benefits of filing Chapter 13 are just some of the ways a personal bankruptcy can help you get the debt relief you need. Our Dallas-Fort Worth bankruptcy lawyers will explain the other benefits of Chapter 13 during a free consultation.

Contact Leinart Law Firm by calling (469) 232-3328 or (817) 426-3328 to request a free bankruptcy consultation with a Texas bankruptcy lawyer.

Schedule a FREE, no-obligation consultation and evaluation today.