Debt Consolidation vs Bankruptcy

Bankruptcy can be brought into itself by the debtor or can be forced by the court where debt is honored anyway of debt restructuring or surrendering of an asset while debt consolidation is a form of refinancing where the entity borrows mostly unsecured family debt to pay off the old outstanding liabilities and consumer debts thus multiple debts are combined into single larger debt with favorable terms.

Bankruptcy is a process where an organization declares that it cannot repay its debt while debt consolidation is a method of taking out new loans to pay off old debt.

Bankruptcy is a legal process where an individual or organization files a petition in court when it cannot honor its financial obligations or pay its debts. In this legal process, the debtor’s assets are measured and evaluated using the value of these assets to make the payment.

There are two main types of bankruptcy – Chapter 7 and Chapter 13 bankruptcy. Chapter 7 refers to liquidation bankruptcy and Chapter 13 relates to reorganization bankruptcy.

Debt consolidation is taking out a new loan to repay the debts. In this process, all multiple debts are combined into a single monthly debt that usually has a more contemporary favorable structure in terms of lower interest rate, less monthly payment, or tenure. That essentially involves applying for an unsecured loan and using the proceeds to pay off the remaining unsecured debt.

The main aim is to lower the interest rate on the debt you owe, allowing the individual to pay less in interest charges and pay more on paying down debt. Unlike bankruptcy, debt consolidation may positively affect the credit score.

Let us see the top differences between bankruptcy and debt consolidation.

• The bankruptcy process has a very harsh impact on your credit score. While using the debt consolidation process may positively affect your credit score.
• Bankruptcy does not allow the debtor to lower its overall monthly payment. In debt consolidation, the debtor has the advantage of reducing its overall monthly payment.
• The advantage of choosing bankruptcy is that they can file for Chapter 7 bankruptcy to consolidate some debt or even dispose of their debt amounts. However, even though the debtor can take a new loan to repay its debt amount, they cannot wipe off their debt completely, as they are still responsible for paying off the new debt amount.
• According to the bankruptcy chapters, the length of a process for Chapter 7 is up to six months, and in Chapter 13, the process takes about 3 to 5 years. However, in the debt consolidation process, the duration is from several months to years, depending on the term of a debt consolidation loan.
• The tax owed by the debtor is refunded, but the money is delayed, and when the debts are discharged when the debtor needs to pay tax. Therefore, there are no consequences of a tax on debt consolidation.

If you are looking at restructuring debt, deciding between debt consolidation and bankruptcy may seem like a choice. Bankruptcy allows you to avoid paying the full debt, which is an easy way out. However, one should also consider the negative effects. Bankruptcy can be opted for if an individual cannot make minimum payments every month or if the total unsecured debt is higher than the annual net income.

Debt consolidation may require more money, but it makes more sense if you plan to make major purchases like a new car or home because bankruptcy may adversely damage your credit score.

This article is a guide to Debt Consolidation vs Bankruptcy. Here, we discuss debt consolidation vs bankruptcy along with infographics and a comparison table. You may also have a look at the following articles: -

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