We’ve all seen advertisements for law firms and non-profit organizations that promise to help “consolidate your debts” into a “single, easy monthly payment”.
If you’re faced with a mountain of unpaid credit card bills, you may view debt consolidation as an attractive alternative to bankruptcy. But it’s important to understand the difference between private debt repayment alternatives and a chapter 13, where a court works with you and your creditors to develop a repayment plan.
Both of these involve working with creditors to develop a structured repayment plan. Debt consolidation involves taking out a private loan that is used to pay off all existing creditors. You then make a single payment to the consolidation lender. This may involve additional fees and costs, although the total payments and interest may be lower to the consolidation lender than your previous individual creditors. A consolidation loan may require additional collateral, such as your home or car, to secure the debt. You also need to know that any reduction of liability during a consolidation may constitute as “income” you’ll have to pay tax on at the end of the year.
An additional difference is when you file a bankruptcy petition the court will issue an automatic stay that temporarily halts all collection activity. That means your creditors can’t call or contact you demanding payment. Debt consolidation does not include an automatic stay, so you may still have to deal with constant phone calls and late-payment notices.
In a chapter 13 bankruptcy, you’re not taking out an additional loan. The court simply approves a repayment plan that your creditors are bound to follow so long as you make the agreed upon payments. Depending on your financial situation, the court may even discharge some of your debts, reducing the total amount you owe.
Privacy is the Biggest Advantage
Perhaps the biggest advantage of debt consolidation over chapter 13 is privacy. Any bankruptcy is a matter of public record and may appear on your credit report for several years. This can affect your ability to secure credit—or even employment—in the future.
A debt consolidation loan is a private action that won’t have as adverse an effect on your credit so long as you make the required payments.
It comes down to two choices. Do you want to preserve your financial privacy and avoid a major hit to your credit score, then a debt consolidation loan may be the way to go. If you’re drowning in debt to the point where you simply need to make a clean break, then chapter 13 bankruptcy could help you make a fresh financial start.
There are many ways to go about debt management and this article only briefly touched on two of the more common options. If you’re facing mounting debts and are unsure how to proceed, consult with our experienced Massachusetts bankruptcy attorney who can provide you with detailed alternatives for working with creditors.