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Debt Consolidation Versus Bankruptcy
Debt consolidation and bankruptcy are 2 debt relief options that can make you debt free. The effectiveness of these 2 debt solutions may differ from one debtor to another. Credit report information provides details of your current financial health and it is important to check the credit report from time to time. Your credit report information can give clue as to which debt help option will suit your situation best. If debt consolidation is good for one debtor, it may not be good for you. The procedural aspects of these 2 debt help options differ and the main differences between the 2 are given below.
If you are planning to consolidate your debts with the help of a debt consolidation company, the company will be working on your behalf to reduce the current interest rate and your monthly payments. The debt consolidation firm will take care of all the paperwork. You will be given a new repayment plan and you are expected to make payments as per that plan. Whether it is a debt consolidation program or any other debt relief option, it has a positive impact on your credit report in majority of the cases.
However, if you have opted for a debt consolidation loan that is secured, you are required to use collateral. In majority of the cases, debtors use their homes as collateral. In case of a secured debt consolidation loan, the interest rate is low as you are using collateral. In case you are unable to make payments regularly, your collateral is taken away by the creditor.
Bankruptcy on the other hand is also a debt help option that can make you debt free. However, this is an option that debtors usually treat it as a last resort. Filing bankruptcy gives you a fresh start. You can either file Chapter 7 bankruptcy or Chapter 13 bankruptcy, depending on your income and debts you owe. In Chapter 7, some of your assets are sold off to pay debtors. In Chapter 13 bankruptcy, you get a repayment plan and you are expected to make payments as per the new plan. It should give you a debt free life within a span of 3 to 5 years. The biggest drawback of filing bankruptcy is, it hurts your credit rating badly and you fail to qualify for fresh credit till the time you don't improve your credit rating.
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