Which is Better: Bankruptcy or Debt Consolidation

When you're dealing with financial difficulties, sometime the best thing you can do is find the option that causes the least damage. If you're wondering which is better, bankruptcy or debt consolidation, the truth is that it depends on your financial situation and what methods you're considering.

Your current financial situation determines which is better, bankruptcy or debt consolidation.
Your current financial situation is the deciding factor to determine which is better: bankruptcy or debt consolidation. Even though you may be struggling financially, you might not be eligible for bankruptcy. Consult an attorney for bankruptcy advice to determine whether you're eligible for bankruptcy. Everyone's financial situation is different, and what is right for a neighbor or family member might not be the right option for you.

Generally speaking, if you can reduce your debt to a manageable level through debt consolidation, it's probably a better offer. Debt consolidation generally has less of an impact on your credit score, and won't cause the same difficulties that a bankruptcy causes for 7-11 years. However, not all debt consolidation is alike, so make sure you know how debt consolidation is going to impact your credit score.

Consider methodology.
Different types of debt consolidation and bankruptcy programs impact your credit differently. A Chapter 7 bankruptcy virtually erases your debt, although you may have to surrender vehicles, possessions and even your home to pay down your Chapter 7 debt. Chapter 13 bankruptcy is more of a structured repayment plan, dictating a schedule for how much and when you'll pay creditors. Both forms of bankruptcy impact your credit for years, but Chapter 13 causes the negative impact and you'll still be repaying your debt.

Debt consolidation also comes in several flavors. You can get a home equity loan, refinance existing loans or even get a personal loan to manage debt consolidation. As long as you make regular payments, these methods have a minimal impact on your credit report. However, some credit counseling services offer debt consolidation programs, and these can have a major adverse impact on your credit score. Make sure you know what you're getting if you choose a debt consolidation plan through a credit counseling service, because the impact can be nearly as bad as a bankruptcy on your credit score.

Bankruptcy is a last resort.
Bankruptcy laws tightened in the mid 2000s, in part as a reaction against the high number of people filing bankruptcy. Through the late 90s and early 2000s, an increasing number of people used bankruptcy to wipe the slate clean and start again. Unfortunately, this bankruptcy abuse caused the government to tighten bankruptcy laws to make it more difficult for people to file unnecessary bankruptcies. Bankruptcy was always intended as a last resort, and you should use it as such when dealing with financial difficulties. Exhaust your other options before filing bankruptcy, including debt consolidation.

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