Carrying the burden of insurmountable debt has many Americans questioning how to move forward and manage their money. Those left with few other options might consider debt consolation or bankruptcy. Knowing the advantages and disadvantages of each will help you decide which is best for you.
Debt Consolidation

Debt consolidation protects your credit score and helps you manage debt by combining several bills into one payment.
Benefits of Debt Consolidation

To give you an idea of why some people choose to consolidate their debt, here are some of the advantages to this strategy of debt management.

• Protects your credit rating. Debt consolidation protects your credit score because, while your credit report might still show a debt consolidation loan, it won’t generally lower your credit score.
• Access to credit. If you choose to consolidate your debt, you can still use your credit cards unless stated otherwise in your debt consolidation agreement.
• A single payment. Consolidating your debt allows you to lump several bills from several different creditors into one easier payment.
• Decreases interest rate and monthly payment. Debt consolidation can lower your monthly payment and give you a lower interest rate.

Drawbacks of Debt Consolidation

If deciding how to manage your debt, you also need to seriously consider the possible disadvantages of debt consolidation.

• Puts your property at risk. Unfortunately, if you choose a secured loan where you use your home or vehicle for collateral, that property could be lost if you fail to pay the consolidated loan.
• Risk of hidden costs. Lower monthly payments and lower interest rates are achieved only because debt consolidation extends the repayment period, and being in debt longer typically translates into paying more money over the life of the loan.
• Additional taxes. Money that you save from debt consolidation may be considered income by the IRS, which means you may have to pay taxes on it.

Bankruptcy

Bankruptcy can eliminate your debt or restructure your payment plan, depending on which type of case you file. Chapter 7 bankruptcy cases generally eliminate most debt, while Chapter 13 bankruptcy cases work to restructure your debt into more manageable payments.

Benefits of Bankruptcy

• Stops harassment. Filing for bankruptcy protects you from creditors by applying an automatic stay that restricts lenders from seeking payment through harassing phone calls, lawsuits, wage garnishments, repossessions, and foreclosure.
• Allows you to start over. Bankruptcy can eliminate most of your unsecured debt or give you a reorganized payment plan to reimburse a portion of your debt. Either way, you don’t have to lose property like your home or car unless you choose to surrender them to settle that debt.

Drawbacks of Bankruptcy

• Lowers your credit score. While filing for bankruptcy will lower your credit score, it is likely that your credit is already in danger if you owe debt that you cannot repay. But after seven to ten years of filing for bankruptcy, you are given a clean slate on your credit report.
• Requires sacrifices. In order to be considered for bankruptcy, you may have to make sacrifices like giving up luxury items and nonessential possessions.
• No Privacy. Bankruptcy is a public record, but your friends and family still shouldn’t typically find out you filed for bankruptcy unless you owe them money.