Should I File For Bankruptcy Or Debt Consolidation?

Should I File For Bankruptcy?

According to the dictionary, the term “bankruptcy” is when a person or business declares legally that they cannot repay their financial obligations or debt to the creditors they borrowed from. Filing bankruptcy chapter 7 or 13 should be a last resort and used only if every other alternative has been explored. Bankruptcy has the ability to affect your financial life for years.

Filing bankruptcy Chapter 7 will haunt your credit score for up to 10 years.

Personal bankruptcy makes it harder to get a bank loan, home mortgage, or get approved for the best credit cards. But if your financials are completely devastated, then filing bankruptcy will give you protection from creditors and presses the reset button on your personal finances.

It can be a tough conversation, but if you have a family member who can help with your debt (without putting themselves at risk) it’s worth considering. If that’s not an option, below are some unassisted options to explore.

8 Most Common Reasons People File Bankruptcy

Here are the most cost reasons people file bankruptcy in the U.S. – the numbers below are based on a 2013 to 2016 consumer report.

Bankruptcy For Credit Card Debt

Before deciding if bankruptcy (Chapter 7 or 13) is the right option for you there are a lot of alternatives for you to consider.

The best bankruptcy alternative is a debt consolidation loan, specifically a credit card debt consolidation. Even though debt consolidation is not helpful in all situations, it could be just enough to keep you out of bankruptcy court.

The basic idea of debt consolidation is to take all of your loans and debts and pay them off with a larger loan. So instead of having a multitude of smaller loans to make payments on, you’ll have one large loan and one monthly payment. In the long run this can save you a lot of money because you will have a fixed interest rate on the larger loan. This is an excellent option if your main reason for filing bankruptcy is credit card debt.

Credit card debt specifically often has super high interest rates, and incur late payment fees. They are usually higher APR interest than other types of loans. And if you miss paying just a single month then you might find yourself in a pit that you can’t get out of. If you have multiple credit cards with debt it can quickly snowball out of control.

If the situation gets too out-of-hand then you likely won’t be able to consolidate your credit card debt or get approved for an unsecured loan. Another option is to apply for a secured loan that uses your house or car as collateral.

Using a secured loan with a lower interest rate can help you start regaining control over your debt and avoid bankruptcy.

Keep in mind that consolidating your loans may not be the right choice for you financial circumstances. Sometimes the best way to handle a personal financial crisis is to file bankruptcy. But it’s important to explore all your options first because bankruptcy is a big choice with a lot of consequences. If you want to learn if debt consolidation can help you then it might be best to talk to a financial professional.

Best Alternative To Bankruptcy

You should never declare bankruptcy if there is another option on the table.

The most common alternative to bankruptcy is credit card debt consolidation.

Ideally you’ll have a 0% APR credit card with free balance transfer. By doing this you’re basically paying off one credit card debt with another with a lower interest rate.

The problem with a balance transfer is that many consumers consolidate their credit card debt to a lower interest card and then start spending again. Lots of people use credit card consolidation as a crutch and fall back into the same trap. It gets even worse the second time because the creditors they owed will give them more credit. And the cycle continues.

Without a budgeting and financial discipline you’ll never get rid of credit card debt.

You need to be honest with yourself at this point. Don’t be tempted with a zero balance on your credit card to charge more.

Second best alternative to bankruptcy is a personal debt consolidation loan. Ideally an unsecured loan, but if you have a bad credit score you may have put up collateral such as a car, home, or another large asset.

Secondly, many people use their home equity to secure debt consolidation loans. That puts your home at risk by adding extra debt. Now in the event of a financial catastrophe in your family, your home is at risk.

Should I for Bankruptcy or Debt Consolidation Loan?

The truth is that the real solution to getting out of debt, is to not borrow money. Spending less money than you’re accumulating is obvious, but it’s easier-said-than-done.

Disregard what you read online or hear on tv – taking on more credit card debt is not going to solve your debt problem.

No matter which option you choose remember that it’s not the end of the world. Even if you end up filing for Chapter 7 bankruptcy you’ll have a fresh start to get your finances back in order without creditors hassling you for payment. If you decide to go this route you should read our article on what you need to file bankruptcy (chapter 7 and 13).

Ultimately your answer lies in budget planning for your family, and planning to pay off your debts one by one. It will take commitment, this will take sacrifice, but the sooner you make that commitment the sooner you will get out of debt and start planning for the future.

Please read our other articles on how to negotiate a lower credit card interest rate and the best ways to get out of financial debt.

Leave a Comment