When the word “bankruptcy” is mentioned, many people who are facing financial difficulties bristle. They may believe that bankruptcy requires taking substantial losses or making serious sacrifices in order to relieve oneself of the tremendous debts that it can alleviate. However, bankruptcy lawyers can tell you that this simply isn’t the case.
One of the most popular alternatives to bankruptcy is debt consolidation. This heavily-marketed choice for debt relief is often touted as a quick and easy way to get out from under your financial stresses, but is it really as simple as it seems? The answer – and how it stacks up against the reality of some types of bankruptcy – might surprise you!
Let’s compare a chapter 13 bankruptcy and debt consolidation to see just which of these is right for the average American – and which might be the best choice for you.
Chapter 13 Bankruptcy vs. Debt Consolidation: What’s What?
To best understand the benefits and disadvantages of chapter 13 bankruptcy vs. debt consolidation, it’s important to understand what each entails and the differences between them. Making informed decisions is the biggest hurdle for many people seeking to undo damage to their finances; that begins with education into the various methods available for addressing your situation.
First, let’s examine chapter 13 bankruptcy. This type of bankruptcy is often referred to as repayment or reorganization bankruptcy. This is because the primary goal of this type of bankruptcy is to allow those who find themselves in debt to gradually pay their way out of it at a rate that they can and within their means – all without losing their property or assets.
While other types of bankruptcy offer debt relief by faster and more complete measures, chapter 13 bankruptcy is the best choice for those who are looking to pay down their debts over the course of three to five years and who have sufficient means to do so. The thing that makes this type of bankruptcy an attractive choice for many in debt is that it gives them the feeling of accomplishment and responsibility that comes with paying down debts themselves – albeit with extra time to do so – and also allows them to make use of payment plans that don’t demand more than they are capable of paying.
Chapter 13 bankruptcy offers the added bonus of exempting most types of property, various types of income and assets, and many things that would be seized during a chapter 7 bankruptcy. This makes it a far less stressful option for those dealing with a personal bankruptcy and a far more workable solution for those hoping to make meaningful moves toward paying down debt.
Next, let’s take a look at debt consolidation and how it differs from bankruptcy. The general idea of debt consolidation is to consolidate or collect all of a person’s debt into one single, more manageable payment each month. The two primary ways that people consolidate debt involve taking out a new loan specifically for consolidation purposes and opening a balance-transfer credit card in order to pay off the balances of old debts and bring those balances onto a single account that can then be paid down in a solitary monthly payment.
These methods may sound simple, but they each present inherent risks and hurdles. While bankruptcy does not require specific credit ratings – and is often entered into with credit in free-fall – debt consolidation is typically available only to those with average-or-better credit scores. This makes it a great choice for those with small amounts of debt who simply need to reorganize it in order to better pay it down. However, it also means that you have to have good credit just to begin fixing your debt with consolidation – a thought process that many consumers find difficult to understand, let alone meet the requirements for.
Selecting the Right Option for Your Unique Situation
While chapter 13 bankruptcy and debt consolidation are not the only options for debt relief, they are some of the most commonly chosen for a variety of reasons. They also represent opposite ends of a spectrum in a certain way; while one is a more gradual and more forgiving path to debt relief, the other feels more stark and is far less forgiving.
It is important to remember that there are benefits to every choice when it comes to debt relief, just as there are disadvantages. Bankruptcy may be perfect for some people, while debt consolidation may be the right option for others. When weighing two vastly different approaches like chapter 13 bankruptcy vs. debt consolidation, staying focused on your individual goals is important in achieving them.
What works for another person, couple, or financial expert may not work for you. Too many people have been talked into following financial advice from a so-called guru at work, church, or their social groups, and ended up in worse financial situations than those they began in. Always check and double check the facts of what you’re weighing before you decide on what to do with your money, whether it’s money you have or money you’re paying back!
To make the right choice between chapter 13 bankruptcy vs. debt consolidation and any other type of bankruptcy or debt relief effort, it is important to speak to a qualified and experienced financial professional. The best choice is a knowledgeable bankruptcy attorney, since these professionals understand both the legal and financial aspects of what you may be dealing with.
For more information on chapter 13 bankruptcy vs. debt consolidation and many other topics, talk to the compassionate and experienced staff at the Van Horn Law Group. They can help you make sense of whatever is happening in your financial life – and make your situation better with the best choices for you.
Chad T. Van Horn, Esq. is a South Florida business leader and founding partner attorney of Van Horn Law Group, P.A. Through a combination of dedicated philanthropy, spirited entrepreneurship and legal expertise, he applies his resources and network to helping people. Learn more about Chad Van Horn