When Should I File for Bankruptcy? How to Determine if Filing is Right for You

You’re feeling overwhelmed. The credit card payments or medical bills are just too much to keep up with in addition to your car payments, student loans, mortgage/rent, and other monthly bills. You’re paying absurd monthly interest charges and never seeing the capital decrease significantly. It’s just impossible to keep juggling all your financial obligations. It’s time to think seriously about your debt management problems. In this blogpost, we will explore the options of debt consolidation and bankruptcy.

Debt Consolidation: What Is It?

In its most basic form, debt consolidation works by combining multiple debt payments into one monthly payment through obtaining either a secured or unsecured loan. That monthly payment is sometimes lower than the individual payments combined, and the interest you pay is sometimes lower as well. You will maintain your access to credit, though incurring more debt increases the likelihood of the debt consolidation failing. If the debt consolidation loan is secured, then you risk losing your collateral, usually your car or other significant tangible property.

Cross-Collateralization

Sometimes you may risk losing collateral that you aren’t aware you have placed in jeopardy. That can happen when your debt consolidation loan has a cross-collateralization clause that lets the lender take other property it has financed if you default on the debt consolidation loan. For example, if you get your debt consolidation loan through the same bank that financed your car, under the cross-collateralization clause, if you default on the debt consolidation loan, the bank could repossess your car—even if the car payments are current.

Debt Management Plans: Hidden Costs

Some people go to an agency that creates a debt management plan for them and negotiates with the credit card companies on your behalf. It’s important for you to know that agreeing to a debt management plan comes with a number of hidden costs – monetary and otherwise. You will be expected to pay an enrollment fee as well as a monthly fee for each credit card on the plan. Also, most credit card companies will require that an account entering into a debt management plan be closed, so you lose your access to credit. And the fact that you’re engaged in a debt management plan will be noted on your credit report. Most debt management plans run for three to five years, and at least half of clients do not successfully complete the plan.

Negative Tax Consequences
Depending on your financial condition, any money you save from debt relief services such as debt consolidation may be considered income by the IRS, which means you pay taxes on it. Credit card companies and other creditors may report settled debt to the IRS, which the IRS considers income.

Debt Consolidation vs Bankruptcy

There are two types of bankruptcy you can pursue: Chapter 13 and Chapter 7. Chapter 7 is means tested, so you need to make no more than your state’s median household income ($60.773 for Wisconsin).* If you qualify for Chapter 7 bankruptcy, your unsecured debt can be completely eliminated. The whole process takes about four months, and then you can start over with a clean slate. Chapter 13 bankruptcy lasts between three to five years, similar to debt consolidation. With Chapter 13 bankruptcy, the moment you file, there is an automatic stay on all collection action, and you will almost certainly retain possession of your home and vehicle.

If you’re considering debt consolidation vs bankruptcy, it would be a good idea to talk to one of the experts at Burr Law.

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