Confused about debt consolidation vs. bankruptcy?
Many are confused by a barrage of radio and television advertising suggesting debt consolidation is preferable to bankruptcy. What’s more, debt consolidators rarely give the whole story on the flaws and failures associated with debt consolidation. Before you spend thousands of dollars in consolidation fees and pay your creditors substantial sums of money, you should understand the critical differences between bankruptcy and debt consolidation. Then you may chose the option best suited to your individual circumstances:
Does debt consolidation immediately stop active lawsuits, garnishments, and pending foreclosures? -NO
Does filing bankruptcy immediately stop active lawsuits, garnishments, and pending foreclosures? - YES
Does debt consolidation prevent collection calls and harassment from creditors? -NO
Does filing bankruptcy prevent collection calls and harassment from creditors? -YES
Does debt consolidation provide statutory rights to debt relief? -NO
Does filing bankruptcy provide statutory rights to debt relief? -YES
Does debt consolidation remove all debts within 90 to 100 days? -NO
Does filing Chapter 7 bankruptcy remove all debts within 90 to 100 days? -YES*
Does debt consolidation provide legal representation to review your debts, legal rights, and remedies? -NO
Does hiring bankruptcy counsel provide legal representation to review your debts, legal rights, and remedies? -YES
Does debt consolidation involve paying substantial sums of money to your creditors in order to resolve the debt? -YES**
Does filing Chapter 7 bankruptcy involve paying substantial sums of money to your creditors to resolve the debt? -NO**
Does debt consolidation guarantee removal of past negative collection comments from your credit report? -NO
Does filing bankruptcy guarantee removal of past negative collection comments from your credit report? -YES
Will debt consolidation typically allow you to keep your house? -YES
Will filing bankruptcy typically allow you to keep your house? -YES
Will debt consolidation typically allow you to keep your vehicle(s)? -YES
Will filing bankruptcy typically allow you to keep your vehicle(s)? -YES
*Removed once a Discharge Order is entered, usually 90 to 100 days after filing date.
**Debt consolidation typically requires 50 to 75% repayment to creditors.
**Chapter 7 bankruptcy typically involves no money ($0) being paid to any unsecured creditors.
A common misconception links bankruptcy filing, and not debt consolidation, to a reduced credit report score. Here are the facts: Bankruptcy remains on a credit report for 10 years, but will typically begin improving a credit score within 12 months. Meanwhile, after 3 to 5 years of paying a debt consolidation program, many are surprised to learn the closed accounts are reported “paid as compromised” and not “paid as agreed.” This effectively “locks in” negative information on the credit report for 7 more years. Critically, only bankruptcy actually removes prior negative comments from a credit report. And, no debt consolidation program can erase prior delinquencies, charge-offs, or compromised settlements of debt.
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The FHA will favorably consider making home loans to individuals only 2 years after discharging their Chapter 7 bankruptcy case.
For most individuals with credit scores below 650, filing bankruptcy will actually cause a substantial increase to the credit score within 12 months of receiving a discharge. (Typically a 40 to 140-point increase).
Debt consolidation fees usually run between $2,500.00 and $3,500.00 and normally must be fully paid prior to any payments going to one’s creditors.
Creditors are not required to accept a debt consolidation proposal, and the government has not passed any new “law” forcing creditors to accept a debt consolidation plan.
Chapter 7 bankruptcy does not require, or even consider, the “willingness” of creditors to approve the discharge and removal of debt.
Even if a debt consolidation program is accepted by most creditors, any particular creditor who rejects the plan has all its legal remedies to collect the debt by “harassment,” file a lawsuit, obtain a judgment and / or garnish the wages and bank account of the indebted person.
BEFORE YOU TAKE ACTION to enter a debt consolidation program costing you thousands of dollars and, nevertheless, significantly lowering your credit score, contact a licensed bankruptcy attorney and know your rights and remedies under the law!
We are a debt relief agency. We help people file for bankruptcy under the bankruptcy code. The Missouri Bar reminds you that the choice of a lawyer is an important decision and should not be based solely on advertising materials.