Whenever you have multiple loans to pay off from different banks, I recommend that you look into debt consolidation to eliminate said loans as early as possible. Not only does it give you a lower interest rate- provided you have a credit score that is high enough- but it also helps you streamline the process of repayment. It does away with the need to repay each loan individually by rolling them into a single balance transfer account. However, with a debt consolidation loan, you still have to repay all the money you originally owed.
Bankruptcy, on the other hand, will eliminate all your debt. However, your credit score will also see a free fall. It can even drop below 200 points in some cases, which will be reflected on your credit report for the next 7 to 10 years. In essence, bankruptcy is hard to recover from in several ways.
Both debt consolidation and bankruptcy are non-reversible. So, what is better for you and your financial situation? I will break it down for you from here on.
What happens during debt consolidation?
Suppose you have several debts that need paying off. A consolidation process combines them into a single loan, which you can pay off through EMI. You only need to heed one interest rate by rolling all debts into one account. Once consolidated, you only have to repay your debt to the new creditor.
While a debt consolidation loan format combines all your debts into a single loan with one interest rate, it does not necessarily mean you will save money. You still have to pay back all the money that you owe. Further, there might be operational fees, maintenance fees, and other charges that you should clarify with your bank or lender.
You might prefer debt consolidation in the following cases:
- If you can repay your debt in due time
- If you’d instead protect your credit score
- If you can qualify for a low annual percentage rate on a personal loan
What happens during bankruptcy?
This is a legal process which can work to reduce, do away with, or somehow restructure your loans. They differ depending on whether it is corporate or individual. Bankruptcy laws might differ and require you to sell or liquidate your assets to pay off the debt. In the latter, or wage earner’s bankruptcy, you can get out of the debt in a 3 to 5-year plan through a restructuring and repayment plan issued by the court. The main difference is that you liquidate your assets in the former, and in the latter, you don’t.
Always remember that bankruptcy is anyone’s last resort. It can be incredibly difficult to land future loans for your house, vehicle, or other assets after you have been bankrupt once. The fact that your credit score will take a considerable hit also does not help the case. However, if all else fails, you have no other options to consider.
You might prefer bankruptcy in these cases:
- If your debt is insurmountable to you
- If you have little to no disposable income to help you pay off your debt
- If you have non-exempt assets that you might lose
- If a bankruptcy judge can reduce your debt.
Final Thoughts
Hopefully, this article sheds some light on the pros and cons of debt consolidation and bankruptcy so that you can make an informed choice to get back to financial health as early as possible.
Lastly, I would like to conclude that critical situations during bankruptcy can also be dealt with patience and the right approaches. I hope my suggestions and guide will help you.
