Bankruptcy is an option for people who do not think they will have the capability to pay off their debts in a normal and timely fashion. In bankruptcy, a consumer's debts are brought together and many of them discharged. While the person is no longer obligated to pay these debts, there are many consequences that can occur. The negative effects of bankruptcy on a credit file can be disastrous and long-lasting. Many see this route as a last resort.
A Chapter 13 bankruptcy involves a plan to repay some or all of the money owed over a set amount of time. This can damage the consumer's credit file, but not as drastically as in a Chapter 7 bankruptcy, where debts cannot be paid over time, assets are liquidated and the majority of debts discharged.
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Alternatively, debt consolidation is the process of receiving a single loan to cover and replace many unsecured debts, which can include education loans, credit cards, car loans and so forth. People who are making payments on a number of credit cards, for example, can combine all of the credit card balances into one lump sum, making one single payment each month. This payment is often much lower and more manageable than making 10 payments to 10 different creditors. Interest costs usually are greatly reduced as well.
While a bankruptcy usually involves lawyers, and the arrangements are finalized by a court representative, debt consolidation loans are handled privately, being provided by a bank or credit union. Debt consolidation brokers can make the process smoother and simpler for the consumer.
With a debt consolidation program, a person may be able to keep credit score intact, without requiring credit counseling. In fact, credit scores can actually improve in debt consolidations. Consumers are also less likely to lose assets in a debt consolidation as opposed to a bankruptcy.
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