When you have a lot of debts with different interest rates, the first thing you will think of is debt consolidation. However, there are certain situations when debt consolidation doesn’t make the cut and other options seem more feasible. Is bankruptcy one of them?
We will compare two financial services—debt consolidation and bankruptcy—and see which one is better for your situation. Note that before you request these types of financial services, you will need to contact an expert to get an idea of what to expect and whether it is a good idea.
Debt Consolidation
Debt consolidation is a great tool you can use to save money and leave your credit rating unaffected. Debt consolidation will transform all your debt payments into one payment. This method’s idea is to lower the monthly payment and interest rate.
You can consolidate your debts through a secured or an unsecured loan. This service requires a certain fee but in the end, you might save more money than before, and you will regain control over your finances.
Here are the pros of Debt Consolidation:
- Your credit rating and reputation are protected. Your credit score won’t be affected, and you won’t be bankrupt, meaning that your financial status won’t be made public. Bankruptcy records are easy to find and view, and this kind of reputation can affect your future financial endeavours.
- You can simplify your debts. This means that you will focus on one payment with one interest rate, but you will also get to pay every debt in one go. In other words, you will no longer have to worry about missing a payment or paying it later than usual and suffering the penalties.
- Unlike other services, debt consolidation will also let you keep your credit cards.
Cons of Debt Consolidation:
While debt consolidation is an excellent method of regaining control over your debts and economy, you could end up paying more in hidden fees and even lose the property. Here are some things to consider:
- Hidden costs: Many people don’t consider the loan term. When you apply for debt consolidation, you will pay less every month and have a lower interest rate, but the loan term will be increased. If you stay in debt for an extended period, you may end up losing more money in the long run.
- Losing property: If you default on your loan, you can lose your car or even your house. Depending on the agreement you signed with your lender, you might end up losing a lot more than just money if you default on your consolidation loan.
Bankruptcy
Bankruptcy should only ever be considered as a very last resort. You can eliminate certain debts when filing for bankruptcy. Here are a couple of positive things that bankruptcy brings:
- When you file for bankruptcy, the creditors cannot harass you or take legal action against you. That means that you also are protected against foreclosures or repossessions.
- Back to square one: Bankruptcy will eliminate most of your debts, and you can get a fresh start. Depending on your financial situation, you can even keep your car and home and pay them at a reduced rate.
The Negatives of Bankruptcy
Like any other financial service, bankruptcy has negative factors that you need to consider before applying. Here are a couple of things you should check:
- Credit rating: Your credit rating will be lowered depending on the type of bankruptcy you apply for and your situation. Your credit report will show the bankruptcy for anywhere from seven to ten years. Of course, you may already have bad credit, seeing that you owe a lot of money and are bankrupt because of it.
- You can have a fresh start once you receive your bankruptcy discharge, but until then, you will have trouble with lenders and other financial institutions.
- Your reputation: Your employer or people who are associated with you business-wise can easily discover bankruptcy.
- Financial sacrifices: You will have to sell your possessions if you want to be eligible for bankruptcy.
In the End
So, is debt consolidation better than bankruptcy? It really depends on your situation and what you want to achieve, but yes. Debt consolidation is a financial solution that can have a positive impact on your life, whereas bankruptcy comes with serious drawbacks.
If you want to learn more about the benefits of debt consolidation call us on 1300 138 188 or visit the Australian Lending Centre for expert advice.
