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chapter 7

Bankruptcy vs. Debt Consolidation

roads of debtWhen you reach that point where you know you can’t get out of the financial hole on your own, you start looking for options. If you think Bankruptcy is the worst thing that can happen, you might look for other ways to get the debt under control. It’s easy to find companies that perform an array of services, including Debt Consolidation, Debt Management, and Debt Settlement. It’s not always clear what these are, so let’s go over them –

Debt Consolidation is where you take out a lower interest loan to pay off all the higher interest loans – turning many debts into one debt. This lowers your interest, but not the principal, and you are still making payments, and subject to collection efforts. In most cases, you are also paying a fee to the company that is buying your debt, in addition to paying the debt and the new interest to that same company.

Debt Settlement is getting creditors to accept less than the full amount. This is attractive, but it will be reported to the credit agency that you paid less, and this will have a negative effect on your credit rating. In most cases, you are paying a fee to the settlement company for their negotiation on your behalf.

Debt Management is where you agree to financial counselling, and a debt management company will negotiate with your creditors. You pay the debt manager, they pay your debts, and maybe along the way they can negotiate some better terms, or arrange for debt settlement. In most cases, you will pay a fee for these services, in addition to your payments to your creditors.

When facing pressure from creditors, you may think about one of these debt services as a less drastic measure compared to Bankruptcy. And while this may be a good option in some circumstances, it’s important to get the facts. First of all, understand what debt consolidation will NOT do.

You are not under any legal protection with a Debt Service Company. When you file for Bankruptcy, your creditors must stop all collection efforts. The Bankruptcy process protects the Debtor, and insures that all harassment stops, under civil penalty for any creditor who contacts you.

In Bankruptcy, your communications with your attorney are privileged. This means that anything that is said between you and your lawyer are private, and no one can break that confidentiality. You do NOT have this confidentiality with a debt service, and anyone you talk to with the debt service can be called to testify against you in court.

Consolidation does not eliminate your debt, and neither does Settlement. In most cases, the debt service will ease your monthly burden – either by reducing the principal or the interest. That sounds good, but it will still appear on your credit report if the full amount was not paid, which will hurt your credit score. Reducing the interest is a good thing, particularly if you were holding some debt at maximum penalty rates – but this still doesn’t relieve you of the debt.

Bankruptcy sounds like the worst option – but it’s a widely misunderstood legal action. Bankruptcy puts the power of the law on your side, and protects you. Bankruptcy attorneys are your advocates, and they fight for you, while you concentrate on rebuilding. In most cases, a Chapter 7 Bankruptcy will eliminate a lot of your debt. If there are debts that cannot be discharged, the reorganization process will give you an opportunity to structure a better payment plan on the remaining debt. After a Bankruptcy, you can still use a Debt Service to work through the remaining debts.

I realize that Bankruptcy is a drastic measure – but if you are in real financial trouble, drastic measures will yield real results. You will have most or all of your revolving credit debt discharged (there are exceptions to dischargeability, please consult an attorney), and you will have a fresh start. Your credit score will improve, and you can start rebuilding your financial foundation. If you are worried about how the Bankruptcy will affect your credit score – remember that debts that have gone into collections will remain on your credit report for years, but getting those debts eliminated through a Bankruptcy makes you more credit worthy – as it is more likely you can pay off a new loan (and you can’t declare Chapter 7 Bankruptcy again for 8 years). Debt consolidation is a half-solution at best – you will still be in debt, and your credit score will not improve – you just change who you pay each month.

Talk to a Bankruptcy lawyer, and get the facts. Lawyers are required by law and the ethics of the profession to tell you the truth about the law, and your rights. Lawyers are trained and licensed by the state to insure that clients understand their situation – this is not true for debt consolidation. After consulting an attorney, if you still want to seek consolidation, you will be smarter about the options, and better equipped to make the right decision. Contact me at Potter Law Firm. “We’ll get you through it.”