Do you understand how bankruptcy and debt consolidation differ?

From an illness to job loss to a loved one’s death, these are just some of the many factors that may cause someone to find oneself burdened by insurmountable debt.

If you’ve looked into debt relief, then both debt consolidation and bankruptcy have likely come on your radar. There are some notable differences between the two debt relief options.

What distinguishes bankruptcy from debt consolidation?

Many individuals who find themselves consumed with debt have multiple balances due each month, each with different interest rates. A consumer seeking a single monthly payment with a lower interest rate may take out a home equity line of credit, an unsecured personal loan or transfer balances onto a single credit card to gain the upper hand on their debt situation.

Bankruptcy is a form of debt relief. There’s a Chapter 7 or liquidation bankruptcy whereby a debtor sells off assets to repay their creditors. The court discharges most of the filer’s debts in this process, with few exceptions, e.g., student loans.

Chapter 13 is a restructuring type of bankruptcy that allows debtors to hold onto their assets, provided they can work out a repayment plan with their creditors to pay back what they owe.

Qualifying for debt consolidation versus bankruptcy

Individuals who wish to consolidate their debts must have a decent credit score or co-signer to qualify for low monthly payments and interest rates. They must also be able to come up with the fees associated with consolidating their debts. Untimely payments could further damage a person’s credit score without any option for discharging their debts.

Anyone wishing to file for Chapter 7 bankruptcy must be able to prove that their income is too low to be able to pay back what they owe to receive a discharge of their debts. You’ll also need to prepare yourself for bankruptcy to remain on your credit report for seven or more years once the court discharges your debts as well.

Understanding which option is best for you

Deciding between debt consolidation and bankruptcy can be challenging. An attorney here in Charleston may want to know more about your financial obligations and ability to pay before advising you which option is right for you in your South Carolina case.