As a consumer bankruptcy attorney I am often faced with the same initial question by many potential clients. Why should I file bankruptcy instead of doing a debt consolidation program? Won’t filing bankruptcy ruin my credit? My answer to many of these people is relatively uniform: I am not here to try to talk you into bankruptcy, but I do want you to be aware of your options, as well as the risks and guarantees each option provides.
The biggest issue I have with many debt consolidation companies, especially companies promoting online communication only as opposed to an in-person meeting, is that most of them are not legitimate. This is not to say that there aren’t those individuals who legitimately can benefit from a debt relief plan. However, in many cases the plan that is offered will take as long, if not longer then, a Chapter 13 bankruptcy and will cost you significantly more money due to the interest that continues to accrue. Of course, this is different than debt settlement, where you are paying less then what you agreed to pay the creditor but there is still the uncertainty of whether the debt consolidation company is paying off your debt directly and then charging you a fee, or if they are trying to negotiate a better rate for you. If the latter is the case and they are not successful, it is possible that you may find yourself in default due to lack of payment for several months while the debt consolidation company allegedly works on your behalf.
One of the key factors that you need to consider is that, if your debt is overwhelming now and you are finding it difficult to stay current on your financial obligations, your credit is already being destroyed. As a result of this, a bankruptcy is probably the best option. In a Chapter 13 bankruptcy case, you are allowed to repay your unsecured debt to the extent you are able to do so. Additionally, if you have fallen behind on a mortgage, auto loan, or any other secured debt where you have used an asset as collateral, you will be given the chance to catch up on those missed payments without accruing interest or penalties in order to save the asset from foreclosure or repossession. In a Chapter 7 bankruptcy, you will not have to pay back any of your credit cards, medical bills, or other unsecured debts. Bankruptcy differs also in that, through a debt consolidation plan, a Debtor generally will repay creditors back over five years with interest and even penalties for missed payments. Meanwhile, when you have a lot of debt and are behind on payments your credit is getting destroyed each and every month you are in default. Your debt to income ratio is another consideration that creditors take into account in giving you credit. Likely bankruptcy is the best option.
Regardless of which way you eventually turn, if you are considering either of these options, this is the time to meet with an experienced debt relief attorney who has experience in both debt settlement and bankruptcy filings. That lawyer can let you know that options are available, what the risks of doing one versus the other are, and what makes the most sense for you. Once you have all the information, you can then make an informed decision.