Debt Consolidation vs. Bankruptcy
Some people would believe going to debt consolidation would be the first step before resorting to bankruptcy but are generally unaware of what each process truly entails.
This is mostly because of the outdated cultural stigma which keeps these topics taboo. This article is here to recite some real life experiences that are quite common in this day and age.
Creditor does not have to agree to a credit consolidation payment plan whereas the creditor must abide by bankruptcy law: Debt consolidation companies will advertise that you can be debt free in 24-48 months by making one low monthly payment. So, you end up sending a debt consolidation company one monthly payment and then the debt consolidation company will then distribute payments to your creditors, so long as the creditor agrees. Outside of bankruptcy, a creditor is not required to accept lower payments than what was contractually agreed or legally owed. What’s really unfortunate is that many people will make these timely monthly payments only to find that a creditor or two did not agree after the fact and found out because they began filing a lawsuit to garnish their wages.
In bankruptcy, this is a different story. In some instances, the bankruptcy code will either wipe out the creditor’s debt with no additional monthly payment to them, will be required to accept a new and lower balance than what was actually owed, will be required to accept a new and lower interest rate than what was actually owed, or is subject to receiving the past due payments over a course of 60 months rather than a lumpsum payment right now.
Outside of Bankruptcy, Creditors can File a Lawsuit against You: With a credit consolidation company, the first hurdle is, the creditor must agree to the reduced payment if it differs from the original contract. If the creditor does not agree and see that a repayment plan will take two years to bring the loan current, they are permitted to file a law suit against you, obtain judgment and have it recorded in public records.
Once a bankruptcy is filed, the automatic stay immediately goes into effect. The automatic stay is an injunction that generally stops creditors from legally collecting on owed debts. This means they cannot call you, e-mail you or file a lawsuit. If a creditor wrongfully collects, they will be subject to fines, sanctions and more.
Continuous Hits on the Credit Report: With Credit Collection, if a Creditor is not being paid, they are permitted to report this to your credit report (so long as the reporting is accurate). Therefore, if you’re in a repayment plan, your credit may continuously get hit periodically until the balance is paid in full.
In bankruptcy, it will be listed on your report once you file. You are able to try to rebuild your credit after this one time hit through.
Bankruptcy should be a last resort is a myth and believing this myth can cause greater financial burden . Speak with a professional and see what works best for you to achieve your goals.