Should I Try Debt Consolidation Over Bankruptcy? Good Question

If you’re in debt, it’s important to consider all your options from debt consolidation to bankruptcy and make a choice that works best for your situation.

In today’s economy, the inability to pay your bills on time is often more the rule than the exception.

For some it feels like a never-ending cycle where you can’t afford necessities on your income, let alone pay for extras like vacations. Many resort to the use of credit cards or take out loans to pay for everything from groceries to cars.

In these kinds of situations it’s easy to fall behind on credit card and loan payments and either take out another loan to pay off the first set of debts or play musical chairs with your credit cards.

It’s common for people who are in debt to transfer balances owed to other cards until the last card standing is maxed out. When you get trapped in this cycle, what are your options to break free?

There Are Non-Bankruptcy Options

One option is debt consolidation. If you don’t know much about this process, you will probably ask yourself how it can help you. To most people, consolidation just means grouping everything together. So if you just total all your debts together, how will that help you pay them off?

While debt consolidation does involve combining all of your debt (with some exceptions such as mortgages and other secured debt), it has advantages that can help you pay debts more easily and more comfortably within a realistic budget.

Consolidating your debts can buy you time while you take the necessary steps to be in control of your finances again.

National Average Credit Card Debt Is Over $8,600

First, realize that you are not alone. Government consumer agencies report that the average household credit card debt in this country is over $8,600. Whether your debt is more or less than this number, the real question is whether your credit card debt is more than you can pay under your current income.

It’s also possible that you have lost your source of income or have taken a severe pay cut due to unemployment, illness, divorce, or other circumstances beyond your control.

No matter your reasons for not being able to pay your debts, consider whether any of the following factors apply to your situation:

  • Do you make only the minimum payment every month?
  • Are most of your payments late?
  • Are you borrowing money to pay for necessities like gas and food?

If you answered yes to any of these questions, then debt consolidation should be one of the options you consider.

You can still also consider filing for bankruptcy but before you do take the leap, debt consolidation is certainly worth investigating.

For example, student loans generally cannot be discharged in bankruptcy, so if student loan payments are contributing to your inability to pay other bills, bankruptcy may not be the best option.

How Does Debt Consolidation Work

Generally, you will have only one loan payment that represents the debts being consolidated.

As with most loans, you will pay interest on the new loan, but if you have been making only minimum payments on your credit cards, chances are that the interest on those cards will be substantially higher than the interest you will pay on the consolidation loan.

A consolidation loan may be much less stressful too.

Having one monthly payment to focus on accumulating the money to pay for, makes it easier for you to control your finances and focus on making payments on other important assets not included in the consolidation loan such as your home, or on everyday life necessities.

Debt consolidation is akin to putting all your fruits into one basket.

With one lower monthly payment plan, you’ll be better the enable to contribute to your savings account be given an opportunity to budget in other areas like preparing for retirement.

You Have Options

One option is taking out a secured loan to pay off your unsecured debt, such as taking out a second mortgage or refinancing your home. But this carries risks. If you are already having trouble paying your bills, failing to pay a second or refinanced mortgage payment may put your home in jeopardy. You need to speak with a professional in order to accurately understand your options.

You may also consider borrowing against a 401k or other retirement plan to pay off your debt but you are essentially borrowing money from yourself to pay off money you have already “borrowed” so this option fundamentally doesn’t stop the cycle of debt. Depending on factors such as your age and when the loan is paid back, you may be subject to other negative consequences such as tax liability.

Any decision about borrowing money should be carefully considered. You’re safest bet is to speak with an attorney that specilizes in bankruptcy and offers differing non-bankruptcy options.

While debt consolidation is only one possible solution to overwhelming debt, it should definitely be considered as an option by weighing the pros and cons and comparing them to other solutions. Making the right decision can affect your current financial situation and the future well-being of yourself and your family.

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