Most Americans have debt. Some of it is "good" debt, like student loans and mortgages, but much of it is "bad" debt, like credit card balances, auto loans, and other consumer loans. As long as you're paying on that debt, there shouldn't be any problems. But what happens when you're laid off, fired, or otherwise can't make your payments? You essentially have two options: you can go through a debt consolidation process or file for bankruptcy.
For the average American consumer struggling with debt, what's the best option?
What is Debt Consolidation?
Simply put, debt consolidation is taking out one loan to pay off many loans. The idea is to get all the debt into one account (at a lower interest rate) to make the payments much easier to handle. There are a few ways that this can be done.
- On Your Own – Many people can consolidate debt on their own, especially if it's credit card debt. By opening a zero percent balance transfer card, you can move all the debt off your high interest cards and get it all in one place. This new card will ideally have no interest charged (usually for the first year or so), helping to lower the monthly payments. These lower monthly payments will be much easier to handle, and the debt can be paid off.
- With a Consolidation Company – For those who have multiple forms of loans, and often don't have good credit, they will need to go with a debt consolidation company. These companies will help to combine the loans into one. They simplify the repayment and generally can help lower bills.
Debt consolidation, however, does not get rid of the debt! Consumers will still owe the same amount, but instead of owing multiple creditors, they now owe one.
What is Bankruptcy?
Filing for bankruptcy is what most people think of when they are having trouble paying their debts. There are many types of bankruptcy, but there are some points that consumers need to know.
- Bankruptcy Doesn't Pay All Debts – One big mistake that people think is that when they file bankruptcy, they will suddenly be debt free. In reality, this isn't always true. Some debt, like student loan debt, is not wiped out by bankruptcy. Other debt might only be reduced and not eliminated.
- Bankruptcy Ruins Your Credit – Sure, right now money is tight, and filing for bankruptcy seems like the only option. However, that filing will stay on your credit report for seven to 10 years, and your credit score will immediately drop as soon as it shows up on the report: usually by at least 200 points. The result is that it is almost impossible to get a loan, even after your financial health has picked back up.
What's Your Best Option?
When it comes down to it, what is your best option: bankruptcy or debt consolidation?
For most consumers, the best option is to go through the debt consolidation process first. This will help them get back on track to repay the loans that they agreed to pay. Often this process will help them to become financially stable again, and in the long run will make them much better off. Not only that, consolidation (and repaying the debt) is better for the individual's overall mental health.
There are situations, however, where there are no other options. If bankruptcy is required, the consumer should find an attorney to help. Not all bankruptcies are equal, and the courts do have a large say in how your credit is affected (and for how long). Bankruptcy has a large negative stigma, and should be avoided if at all possible.