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Debt Consolidation or Bankruptcy?




Bankruptcy!!! When you hear these words, when you see the bill board signs along the interstate or when you're watching that commercial where you see an attorney say, "are you thinking about bankruptcy, before you do, blah, blah, blah, etc....." is the last thing you hear as you start ponder your immediate financial situation, what comes to your mind? How do you feel personally? Is it really TABOO to even say Bankruptcy? Anyone facing insolvency may dread the outcome of having to file for Bankruptcy because it is so often seen and talked about as a bad thing. All you may be thinking about is I am going to loose everything. I have failed. My finances are a mess, my family is stressed, I am embarrassed, or just plain feeling hopeless.


Bankruptcy is not necessarily a bad thing. There are times in your life or in business where this consideration comes up and may even be the best option based on the totality of the immediate financial challenges you are facing. One of the main purposes for bankruptcy is to help you get a fresh start if you have tried everything you know to do. To get you from under the debt when you are on the verge of losing everything, getting constant calls from debt collectors, or facing significant legal fees and judgments where you could loose your home, your car, your business, or potentially even your job if you are not able to get your finances under control.


There are different types of bankruptcy's and some of the most common types are Chapter 7, 11, and 13. Which one you file a petition under will depend on a number of things including whether you are an individual, a business, the size of your business, the amount of assets you own, and more. Many people think you can just say I am going to file for bankruptcy because I have a lot of bills that I can't pay or I don't want to lose my home or other assets.



Before filing for bankruptcy, I often like to ask the following questions, what are your bills? Have you tracked your monthly expenses to have an accurate picture of what you pay out each month? Have you spoken with a Bankruptcy Attorney first? Have you considered other options? Have you considered the cost to began filing for Bankruptcy and going through the initial process?


There are many things to consider like court filing fees, attorney's fees, multiple appointments and having to schedule time off of work to go to court, having to do a Certificated, 1 hour Financial Counseling session and another later Debt Counseling session where you have to come up with a budget and plan for your expenses, dealing with a court trustees and more. The point is, filing for bankruptcy is not only a very costly decision at times, in some cases it is very time consuming and can take up to 6 months depending on the complexity and nature of your financial situation.


I also like to make people aware that while yes, you may have a "temporary stay" from harassing creditor calls, your car being repossessed, or your house being foreclosed on; there are other options out there that you may want to explore first. I will talk about these in a moment.


Another area is Debt Consolidation! Many people are being taken advantage of with some of these programs because they are not fully aware of the outcomes as it relates to their credit and pocket book in the long run because they do not fully understand what debt consolidation works.


Just like with bankruptcy, Debt Consolidation can have negative long-term effects on your credit by up to 10 years in some cases. This is why it is important to understand all your options and know why you are choosing one option over the other considering both the pros and cons.


Debt Consolidation is a broad term that can be broken down into three main categories for your consideration, 1) A debt Consolidation Loan, this is where you actually apply for a new loan with the hope of paying off the old debt.


A. You will now have a new loan that paid off your old debt.


B. you will have to now make one monthly payment to a single organization instead of multiple organizations.


C. Your new loan may be comparable to what you were paying before, in some cases you may have a higher monthly payment based on how high your interest terms are.


D. Often times, when a persona does a Debt Consolidation Loan, they find themselves right back in the same or similar situation.


F. This loan usually results in a Hard-pull on your current credit score causing it to go down even more and if you are denied, that does net help either.


G. If you already have a low credit score, you will get offers subprime lenders that may charge interest in excess of 30 percent in some cases.


F. Can take several more years to pay off because all you did was move money from one place to another.


G. Many times the borrow is not given all the facts of their new loan, they full understand their terms or how the interest is actually calculated on a daily or monthly basis.


These are some of the reason why it is so important to really know what your getting into before you just some I am going to file for Bankruptcy and be done with it or I will just get a loan to pay everything off to have a fresh start when in fact the Debt Consolidation Loan brings temporary relief, is really just a restart of those loans you were struggling to pay in the first place.


Below are some alternative options or things to consider that I often recommend as viable steps to a long-term solution:


A. Have you sat down and communicated with your spouse or your friends and loved ones regarding any money owed them or credit they may be tied to? Communication between those closes to you is one of the key areas I find that causes some families to get out of balance in the first place because they don't really trust each other or just want to only share some much and leave other things separate yet you are living in the same household.


B. Excess spending on credit cards or just a "cash-in, cash-out mentality" where some people no matter how much money they have, will spend it as long they have it and see something they want. I like to suggest giving your self a max limit or percentage of what you are going to spend on your credit cards each month if you can afford to pay it off each month to set a percentage you will not go beyond.


C. How are you currently tracking your finances each month? What type of budget or Spending Plan do you have in place that you can periodically review? With a tracking, categorize each item under your Fixed and Variable or Irregular expenses to see where your money is going. See if there are areas your you can make some adjustments or reallocate some funds. You may find that you have the money, it's having to make some necessary changes to start attacking the debt.


D. If you are financially capped and can not make any adjustments due to a medical situation, lost of income, or other, I may then suggest speaking with a a Non-Profit Debt Management Program to see what options they may have available to help you get out debt and overcome specific financial challenges. Many of these Non'Profit DMP's may be able to help you negotiate with your creditors to get your monthly payments lowered, interests reduced, and your monthly payments consolidated into one as a part other their program. They are often very good and helping individuals and their families over come temporary financial setbacks.





I often recommend working individuals in these type situations to speak with DMP before going the route of BK or Debt Consolidation as possible viable alternative. The Non_Profits often have certified and highly experienced staff that have help go over an entire Debt Management process with you and will function in the capacity of Limited Power of Attorney on your behalf to deal directly with your creditors and dispersing payments to them so you don't have to.


One last thing, with many Debt Consolidation programs that are out there. They will often say give us your information on all your creditors and we will contact them to help get your debts paid off. We will keep you up dated on what is going on and may even provide some other debt resolution services as well. What you don't realize is, your credit takes a major hit because they tell you to stop paying your debts and to start paying them a monthly fee that can be in excess of $800 in some cases. They accumulate the money in a separate account to be dispersed at a later future date once they have built up their profits and then because accounts are closed or in major default, they will negotiate with your creditors on your behalf at a substantial savings by as much as 50 to 60 percent. If the difference in the unpaid debt is significant enough, over $600 dollars, you will usually receive a 1099 to pay taxes on the difference.


This another strategy, in the worse case scenario, where you could have done the negotiations yourself, saved a lot of money in fees, usually into the thousands, over a years time, and if you had the money, to negotiate up front, you could do it with a "pay for delete or good will offer letter" to see if you can get the debt removed after receiving an agreement to pay based a certain amount.


These are just some of the common strategies implemented by people across the country everyday.Working with a Financial Counselor or Debt Management Program based on your specific situation may often times be the best route to go since they have a vested interest in serving others and really wan to see you be successful financially and adept at managing your finances well.




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