Before filing for bankruptcy, consider debt consolidation loans that enable you to refinance credit card debt with a refinance mortgage or a home equity loan after a bankruptcy.
BD Nationwide has helped countless homeowners avoid consumer credit counseling or bankruptcies simply by connecting them with mortgage lenders and counselors that offer solutions for consolidating revolving debt into a reduced rate loan that carries a fixed interest rate.
There Are Pros and Cons to both Debt Consolidation and Filing for Bankruptcy
Numerous consumers are grappling with substantial credit card debt and finding it challenging to meet the recently heightened payments. In the past, individuals facing financial strain with no apparent solution could resort to filing a Chapter 7 bankruptcy, thereby eliminating any unsecured loans. However, with the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, filing for bankruptcy is no longer the straightforward remedy it once was. Renowned bankruptcy specialist Michael H. Reed, a partner at the law firm Pepper Hamilton LLP in Philadelphia, clarifies, “Under the new amendments, the bankruptcy trustee, or any creditor, can move to dismiss a Chapter 7 filing if the debtor’s income is greater than the state median income.”
Given that bankruptcy may no longer be the optimal choice, a more favorable alternative is debt consolidation loans. If you possess equity in your home, this might be an opportune moment to leverage it and bring your credit card debt under control. A bad credit home equity line of credit can be employed to settle all credit card debt, offering lower payments compared to a credit card because of its extended amortization period. Opting for a fixed-rate mortgage refinancing with FHA after a Bankruptcy ensures consistent monthly payments, providing a clearer picture for devising a plan to repay your debt.
While a variable home equity line of credit (HELOC) is also a consolidation option, it’s advisable to compare interest rates. If your intention is to settle the line of credit promptly, it could be a sound decision; however, considering the rising rates, securing a fixed-rate second mortgage might prove more prudent.
Refinancing your existing mortgage is another avenue, allowing you to either cash out or reduce your mortgage payments. Opting for an adjustable-rate mortgage can yield short-term savings, particularly if you plan to sell before the rate becomes variable. Mortgage refinancing also provides an opportunity to extract equity in a lump sum and discharge your unsecured debt. – Article written By Rebecca O’Connor for BDNationwide
Bankruptcy vs. Debt Consolidation Loan: Which Is Right for You?
If you’re struggling with overwhelming debt, it’s essential to understand the options available to help you regain control of your financial situation. Two common solutions are filing for bankruptcy and taking out a debt consolidation loan. Both have their advantages and drawbacks, and the right choice depends on your financial goals, the type and amount of debt you have, and your ability to repay it. Here’s a breakdown of bankruptcy and debt consolidation loans to help you decide which option may be right for you.
What Is Bankruptcy?
Bankruptcy is a legal process designed to help individuals or businesses eliminate or restructure their debt. There are two main types of personal bankruptcy:
- Chapter 7 Bankruptcy: Known as “liquidation bankruptcy,” Chapter 7 allows you to eliminate most unsecured debts, such as credit card balances, medical bills, and personal loans. In this process, some of your assets may be sold off to repay creditors, although many people can keep certain protected assets like their home or car. This type of bankruptcy typically discharges most of your debt within a few months, giving you a fresh financial start.
- Chapter 13 Bankruptcy: Known as “reorganization bankruptcy,” Chapter 13 allows you to keep your assets and create a repayment plan to pay off a portion of your debts over three to five years. After you complete the repayment plan, any remaining eligible debt is discharged.
What Is a Debt Consolidation Loan?
A debt consolidation loan allows you to combine multiple high-interest debts into a single loan with a lower interest rate. This loan can be used to pay off credit card balances, medical bills, or other unsecured debts. By consolidating your debt, you simplify your payments into one manageable monthly payment, often at a lower interest rate, which can save you money over time.
Debt consolidation loans are typically offered by banks, credit unions, and online lenders, and may be secured (using collateral like your home) or unsecured. This option is best suited for those who have a stable income and can repay their debt without needing to eliminate it completely, as bankruptcy does.
Pros and Cons of Bankruptcy
Pros:
- Debt Relief: Bankruptcy provides a way to eliminate or significantly reduce most unsecured debts.
- Immediate Relief from Collection Efforts: Filing for bankruptcy triggers an automatic stay, which halts creditor collection efforts, including wage garnishments, lawsuits, and phone calls.
- Fresh Start: After bankruptcy, most of your debts are discharged, allowing you to start over with a clean financial slate.
Cons:
- Long-Term Credit Impact: Bankruptcy remains on your credit report for seven to 10 years, making it difficult to obtain credit, take out loans, or secure a mortgage.
- Asset Loss: In Chapter 7 bankruptcy, you may lose some assets, as the court may require you to sell non-exempt property to repay creditors.
- Stigma and Emotional Stress: Filing for bankruptcy can carry a social stigma and cause emotional stress, as it may feel like failure to some people.
Pros and Cons of Debt Consolidation Loans
Pros:
- Lower Interest Rates: Consolidating high-interest debts into one loan with a lower interest rate can save you money in the long run.
- Simplified Payments: Managing one monthly payment is easier than juggling multiple creditors and due dates.
- No Credit Score Hit: Unlike bankruptcy, debt consolidation does not have the same negative impact on your credit score. In fact, consistently making payments can improve your credit over time.
Cons:
- Requires Good Credit or Collateral: To get the best interest rates on a debt consolidation loan, you typically need a good credit score. If you have poor credit, you may be required to provide collateral, such as your home, which adds risk.
- Does Not Eliminate Debt: Unlike bankruptcy, a debt consolidation loan doesn’t reduce your overall debt—it simply restructures it, and you’ll still need to pay back the full amount you owe.
- Longer Repayment Terms: While your monthly payment may be lower, consolidating your debt into a longer-term loan can mean paying more in interest over time.
Which Option Is Right for You?
The choice between bankruptcy and a debt consolidation loan depends on your financial situation:
- Choose Bankruptcy If:
- You have more debt than you can realistically repay within five years.
- You need to eliminate or significantly reduce your debt load.
- You are facing aggressive collection efforts that are affecting your ability to live comfortably.
- Choose a Debt Consolidation Loan If:
- You can afford to pay off your debt with lower monthly payments over time.
- You have a stable income and can make regular payments.
- You want to avoid the long-term credit impact of bankruptcy.
Both bankruptcy and debt consolidation loans are viable options for managing overwhelming debt, but they serve different purposes and come with unique consequences. Bankruptcy offers a way to discharge most of your debts and start fresh, but it has a long-lasting impact on your credit. A debt consolidation loan allows you to manage your debt more effectively while preserving your credit score, but you must be able to repay the full amount. Carefully consider your financial goals, the amount of debt you have, and your ability to repay before deciding which path to take.