Difference Between Bankruptcy and Debt Consolidation

Bankruptcy vs Debt Consolidation
 

Debt consolidation and bankruptcy being two methods that are used by individuals and firms to manage their debtsknowing the difference between bankruptcy and debt consolidation is important to decide between the two to manage one’s debt. Both debt consolidation and bankruptcy offer some form of relief when someone has to pay off an overwhelming amount of debt. In order to decide between the bankruptcy and debt consolidation, it is important to thoroughly understand what each process entails. The following article offers a clear overview of each and explains the similarities and differences between bankruptcy and debt consolidation.

What is Debt Consolidation?

Debt consolidation is a technique used in modifying debts to make them more manageable. A debt consolidation strategy allows individuals and businesses to save money on debt repayments and serves as a way to protect and maintain their credit ratings. So how does debt consolidation work? Debt consolidation allows borrowers to combine all their loans and debts. Once the debts have been combined the borrower makes only one payment to the debt consolidation firm that manages the funds and disperse it among the many lenders. A debt consolidation loan allows the borrower to take a loan to pay off all debts in various banks and financial institutions in one go and allows the borrower to manage one loan. In government debt consolidation, the loan is offered by a government institution. 

Debt Consolidation

Pros and Cons of Debt Consolidation

Pros:

• Debt consolidation allows borrowers to manage debts in a more effective manner and allows them to maintain their credit rating.

• Debt consolidation makes it easier to pay off debt, because instead of paying multiple debt repayments at a number of rates debt consolidation allows borrowers to make one payment.

• The debt consolidation firm is able to negotiate lower interest rates, lower monthly payments and better terms thereby reducing the burden on the borrower.

Cons:

• It is possible that the property that is pledged as collateral may be seized.

• A cross collateralization clause may mean that an asset pledged as collateral for one loan may be seized for the default in payment over another loan, even though the loan for which the asset was originally pledged for has up-to-date debt payments.

• Borrowers may have to pay taxes on the money that they save from debt consolidation.

What is Bankruptcy?

Bankruptcy gives the borrower the option to either eliminate debts or restructure their debts to a more manageable manner. In order to file for bankruptcy, the borrower has to file their case at a bankruptcy court. They can choose between chapter 7 bankruptcy which eliminates most debt, chapter 13 which allows the borrower to restructure their debts and adopt a manageable repayment plan or chapter 11 which is filed or by corporations. Bankruptcy may be expensive as it involves legal fees. Further, it can damage the borrower’s credit report and make it difficult to obtain loans and other lines of credit. However, bankruptcy offers the borrower protection from creditors (temporarily for chapter 13 as the borrower still needs to make debt repayments).

Difference Between Bankruptcy and Debt Consolidation

What is the difference between Bankruptcy and Debt Consolidation?

Debt consolidation is a financial relief offered to borrowers who make a number of debt repayments to a number of institutions at varying interest rate levels. A debt consolidation strategy allows the borrower to make one payment possibly at a negotiated lower interest rate instead of making payments to a number of firms. Bankruptcy also offers financial relief where the borrower can either restructure their payments in a manageable manner or eliminate certain types of debts completely. The main difference between bankruptcy and debt consolidation is that debt consolidation is privately managed whereas bankruptcy is made public through public record. Debt consolidation does not affect your credit score, whereas bankruptcy can affect your credit rating and make it very difficult to obtain loans.

Summary:

Bankruptcy vs Debt Consolidation

• Debt consolidation and bankruptcy are two methods that are used by individuals and firms to manage their debts.

• Debt consolidation allows borrowers to combine all their loans and debts. Once the debts have been combined the borrower makes only one payment to the debt consolidation firm that manages the funds and disperse it among the many lenders.

• Bankruptcy gives the borrower the option to either eliminate debts or restructure their debts to a more manageable manner. In order to file for bankruptcy, the borrower has to file their case at a bankruptcy court.

• The main difference between bankruptcy and debt consolidation is that debt consolidation is privately managed whereas bankruptcy is made public through public record.

• Debt consolidation does not affect your credit score, whereas bankruptcy can affect your credit rating and make it very difficult to obtain loans.

 

Photos By: Chris Potter (CC BY 2.0)

Further Reading:

  1. Difference Between IVA and Bankruptcy
  2. Difference Between Liquidation and Bankruptcy
  3. Difference Between Bankruptcy and Insolvency
  4. Difference Between Bankruptcy and Foreclosure