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Should I consolidate my debt or file for bankruptcy?

If you are struggling with debt, you are not alone. In this economy, millions of people in the United States are having trouble paying their bills. Whether it was a job loss, illness, divorce or other matter that has affected your ability to make ends meet you do have options. Two of these options are debt consolidation and bankruptcy.  We will weigh some of the important pros and cons of each here.

Debt Consolidation

Debt consolidation is the process by which you combine several debts, usually from different creditors, and obtain a loan to pay them off. You then pay off the loan, which usually has a lower interest rate. This lowers the monthly financial burden and makes things easier for the debtor to keep track of. If you are participating in a debt consolidation program, you will still have access to credit. It is also a private process (others will not be aware that you are having trouble paying your bills) and it usually doesn’t lower your credit score. But, there are costs associated with debt consolidation. Interest and late fees continue to add up until you pay off the individual debts using the money from the loan. There are usually also tax implications. According to the Internal Revenue Service, any debt or portion of a debt that is cancelled is considered income and will create a tax liability.

Bankruptcy

Bankruptcy is the legal process by which you eliminate your debts. Individuals can file for Chapter 7 (liquidation of assets to pay debts) or Chapter 13 (restructuring of debt which is then paid down over a certain amount of time). Once the bankruptcy process is complete, the debtor has a fresh start.  One benefit of filing bankruptcy is the automatic stay.  The automatic stay prevents creditors from engaging in collection efforts and the accrual of interest during the bankruptcy proceeding. But, you may lose your property in bankruptcy and the process is public, so others can find out about it. It also affects your credit score.

If you are overwhelmed by debt and you think filing for bankruptcy might be right for you, you should speak to an experienced bankruptcy attorney right away.

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