Debt is not a new problem in America, but the worsening economic situation has made it a much bigger one than it used to be. More people are finding themselves in debt with no foreseeable way to pay back everything they owe. But hiding from debt collectors and letting the situation spiral out of control will only make things harder. A more proactive approach to controlling debt such as debt consolidation can provide financial and psychological relief from the burdens of unpaid bills.
Debt consolidation is an excellent choice when you’re forced to deal with debt head-on, but declaring bankruptcy is the widest known method. Many people do not understand how harmful declaring bankruptcy can be to their future, though. Declaring bankruptcy has several disadvantages when compared to debt consolidation.
- You may lose assets that are not protected by state law. If you file for Chapter 7 bankruptcy then you may have to liquidate any property that you are not specifically entitled to keep in order to pay your creditors.
- Your credit rating will suffer for years. Filing for any type of bankruptcy can hurt your chances of qualifying for loans in the future because it harms your credit rating severely. A bad credit rating from bankruptcy can last up to a decade.
- You must file for bankruptcy in a federal court. In order to receive the federal protection that bankruptcy provides, you must first go through the court system. This means that you will probably also have to hire a bankruptcy attorney for an additional hefty fee.
- Your retirement savings are not necessarily safe. Bankruptcy protection does not guarantee that you can keep the money in your 401k and up to $1 million in your IRA, but anything else that you have saved for the future can be taken to satisfy your debt.
Declaring bankruptcy is one way to try and manage your debt, but this extreme measure is not your only recourse.
Debt Consolidation: A Better Alternative
Debt consolidation can provide you with a way to get out of debt and gives you more control over your finances than bankruptcy does. Debt consolidation works by taking your existing debts and placing them into a single loan. The debt consolidation company then uses that loan to pay all of your monthly bills and to negotiate lower interest rates with your creditors. There are several benefits to using this method to handle debt:
Lower monthly payments
Debt consolidation can reduce your monthly payments so that you have the ability to pay what you owe each and every month without having to struggle as much. By using one large loan to pay off multiple debts, you can give yourself more time to become financially stable. You also no longer have to worry about making sure that you pay several different bills on time each month.
Pay more towards the principal
Debt consolidation allows you to put more of your money towards reducing your debt instead of using it to pay off interest. If your debt becomes bad enough the minimum payment on a credit balance may be lower than the finance fees. If this happens, your balance may rise even if you are no longer using your credit card. By securing lower interest rates from your creditors, a debt consolidation company help make sure that your money goes to getting you out of debt and not towards paying over the top fees.
Rebuild your credit rating
While bankruptcy damages your credit rating, debt consolidation can actually help. Debt consolidation plans guarantee that your credit card bills get paid on time, so you should actually see your credit rating improve. With an improved credit rating you can get better rates on loans once you are out of debt.