In fact, debt consolidation can improve your credit rating, while bankruptcy has a negative impact that stays on your credit report for years. With Chapter 13 bankruptcy, the goal is to reorganize the debt through a three- to five-year repayment plan. Before you dive into debt consolidation or filing for bankruptcy, it's worth researching the other options for getting out of a mountain of credit card debt. The court and your lawyer will draw up a three- to five-year repayment plan, during which you will make payments on your debt.
Bankruptcy is a legal process in which a person or organization files a petition in court when they cannot meet their financial obligations or pay their debts. Generally speaking, debt consolidation is a preferred option if you are eligible for a lower interest rate than you currently have for your debts and if you expect your financial situation to improve in the future. The state of your finances should be the determining factor when weighing the choice between debt consolidation and bankruptcy. While there are a variety of techniques to reduce debt and make it more manageable, debt consolidation and bankruptcy are two of the most common and effective.
It makes sense that debt consolidation, which reduces the number of your creditors and your monthly payments, will improve your credit rating, as long as you continue to meet the required one-time monthly payment obligation. If your debts are piling up and you start to feel overwhelmed, a debt consolidation strategy can help ease the pressure and save money in the long term. However, debt consolidation loans may require a co-signer and may have hidden costs, such as longer repayment periods, meaning you pay more in the long run. Debt consolidation is the combination of multiple high-cost loans or credit card accounts into a single debt with a more affordable interest rate.
When determining whether to opt for bankruptcy or debt consolidation, the individual financial situation of each borrower will be the predominant consideration. Bankruptcy is a process in which an organization declares that it cannot pay its debt, while debt consolidation is a method of requesting new loans to pay off old debt. While you may have to go through a strict credit check to get a debt consolidation loan, which can affect your credit rating, this is usually temporary. If you realize that you have too much debt and a consolidation plan is unlikely to free you from it in five years, bankruptcy as a last resort might be the best option.
In this process, all of the multiple debts are combined into a single monthly debt that generally has a more contemporary favorable structure in terms of lower interest rates, fewer monthly payments or permanence.