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Bankruptcy or Debt Consolidation: Which Is Right for You?
A licensed bankruptcy attorney can help you understand your debt relief options, including debt consolidation, Chapter 7 and Chapter 13.
June 13, 2010 /Money PR News/ -- People find themselves in financial trouble for a variety of reasons. Whether it is the result of unpaid medical bills, divorce, the loss of a job or any other reason, more and more people are struggling to find a way out of debt.
Regardless of how a person finds him or herself with financial difficulties, the question quickly becomes "How do I get out?" People in these situations do have options, but the right choice will vary from person to person.
For many people, the choice often comes down to the decision to file bankruptcy or work with a debt consolidation company. Though the goal of both is to help people reduce or eliminate unmanageable debt, they differ dramatically in their approaches.
Advantages and Disadvantages of Debt Consolidation
Debt consolidation is the process of combining multiple debts into one, allowing the person to make a single payment for all amounts owed. For those with multiple credit cards or smaller debts, this may be an effective approach. However, many people using debt consolidation focus on chipping away at existing debt while ignoring the larger issues.
Most important, they fail to ask how they got themselves to this point in the first place and refuse to consider necessary lifestyle changes to avoid future problems with debt. This is especially problematic when using a debt consolidation company, because credit lines often remain open, tempting people to fall back into the same trap. Service fees must be paid before any of your money is used to benefit any of your creditors.This is money that could be used to pay off creditors.
Usually, people have a combination of secured debt - such as cars, furniture and mortgages - plus unsecured such as credit cards and medical bills. Debt consolidation can only help you with unsecured debt. This results in a disorderly distribution of funds.
Finally, the debt consolidation process includes no provision to stop collection actions.
Bankruptcy Preferable in Many Cases
For people with more debt and more complex financial problems, bankruptcy may be the best approach. For personal bankruptcies there are essentially two options.
Chapter 7 bankruptcy is sometimes referred to as "straight" or "liquidation" bankruptcy, because your unsecured debts are discharged, or eliminated. Chapter 13 bankruptcy, however, allows you to pay back your debts over three to five years, discharging any remaining unsecured debt at the end of the payment plan. One benefit of bankruptcy that is not available through the consolidation process is the "automatic stay", which stops all foreclosures, garnishments and most collection activity against you.
Another advantage of the Chapter 13 process is the orderly distribution of funds. It stops payment, interest and penalties on credit cards for a period of time, while your first payments are made to more important creditors that hold car loans or mortgages. Also, the bulk of the attorney fees and not required up-front but are paid along with your other debt, in the same manner as debt consolidation fees.
Bankruptcy gives people a chance to start over. To determine which type of bankruptcy is right for you or if you qualify, it is best to discuss your situation with an experienced bankruptcy attorney.
Lack of Regulation for Debt Consolidation Companies
While bankruptcy attorneys are licensed and regulated by state bar associations, there is little oversight for debt consolidation companies. Last year, the Texas Attorney General filed suit against a debt settlement company, alleging that it withheld millions of dollars from its clients. Ironically, the debt settlement company itself was going through the bankruptcy process at the time. This is only one example of an increasing problem. In Texas alone, consumer complaints to the Better Business Bureau against debt consolidation and settlement companies rose 15 percent from 2008 to 2009.
If you find yourself facing overwhelming and unmanageable debt, it is best to seek the advice of an attorney. Discussing your situation with a lawyer who is knowledgeable or board certified in consumer bankruptcy can you help decide if bankruptcy is right for you.
Article provided by Rosenbaum Law Offices
Visit us at www.rosenbaum-law.com
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