If you're looking into chapter 13 bankruptcy, it may have occurred to you that it's somewhat similar to debt consolidation. In both chapter 13 bankruptcy and debt consolidation, you're able to restructure your debts into manageable, payable amounts.
The end result of both processes is that you have a plan for paying off your debts within a set amount of time, usually anywhere from three to seven years. However, some distinct differences often make chapter 13 a better option.
Your Debts Could Be Sent to Collections
When you declare bankruptcy, you're protected from further collections actions throughout the process. When you consolidate your loans, your loan consolidator will attempt to negotiate with each of your creditors. This often involves a period of not paying your debts.
During this time, your debts could be sent to collections. This can have a profound impact on your credit score. If you're avoiding bankruptcy specifically to preserve your credit score, this may not be the best solution.
Further, your debt collectors will still be calling and sending you notices. If you don't pay, you could be taken to court and have your wages garnished. All of these collection actions are prohibited when you declare bankruptcy.
You May Not Be Able to Settle
Loan consolidation banks on the idea that your loan consolidator will be able to negotiate settlements on your behalf. If you owe $10,000, the loan consolidator may ask for a settlement of $5,000. Through this, they are able to help you pay your debts.
However, nothing stops the lender from simply saying no to a settlement, in which case the loan consolidation may not save you much money. Lenders will only settle if they feel as though they can't possibly get more money from you.
You May Owe Taxes
When debts are settled by loan consolidators, the amount that they reduce your account by is considered to be income. If they cut a $10,000 debt in half to $5,000, you'll owe taxes on $5,000 as profit to you. Though you'll be able to save some money, it won't be as much as it appears.
There are no taxes related to a bankruptcy, so when you discharge your debts through a bankruptcy you won't owe any additional taxes.
You May Have to Wait
Due to the fact that debt consolidation involves a lot of negotiations, the process can take a long time. You may need to go through a period of not paying your debts to show hardship, and then the debt consolidator will arrange settlements and put you on a payment plan.
Bankruptcy is usually faster. Not only does that mean that you have the peace of mind of knowing that everything has been completed, but it also means that you can start working on your financial future faster. Both processes are going to hurt your credit rating, but the faster you can start recovering, the faster you can start building your credit back up.
You Might Get Scammed
Finally, some (though not all) loan consolidation companies are scams. Though they will help you with your debt, they may pocket a substantial amount of your settlement savings, and they may charge you a fee on top of that. Bankruptcy attorneys and bankruptcy firms will always be working in your personal interest.
Ultimately, chapter 13 bankruptcy is usually your best bet because it affords you protections that debt consolidation cannot. You will often end up paying more under a debt consolidation plan than you would otherwise, defeating the purpose of taking control of your financial situation. For more information about recovering from debt, consult with the professionals at Affiliated Legal Services, Inc.