Difference Between Debt Consolidation and Bankruptcy

Bankruptcy is a process where an organization declares that it cannot repay its debt while debt consolidation is a method of taking out new loans to pay off old debt.

What is Bankruptcy?

Bankruptcy is a legal process where an individual or organization files a petition in court when it cannot honor its financial obligations or pay its debts. In this legal process, the debtor’s assets are measured and evaluated using the value of these assets to make the payment.

There are two main types of bankruptcy – Chapter 7 and Chapter 13Chapter 7 And Chapter 13A person must surrender an asset to creditors under Chapter 7 bankruptcy, and a trustee is assigned to manage the property. Chapter 13 bankruptcy, on the other hand, is designed to allow you to keep all of your property while having your debts discharged through restructuring.read more bankruptcy. Chapter 7 refers to liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more bankruptcy and Chapter 13 relates to reorganization bankruptcy.

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What is Debt Consolidation?

Debt consolidation is taking out a new loan to repay the debts. In this process, all multiple debts are combined into a single monthly debt that usually has a more contemporary favorable structure in terms of lower interest rate, less monthly payment, or tenure. That essentially involves applying for an unsecured loanUnsecured LoanAn unsecured loan is a loan extended without the need for any collateral. It is supported by a borrower’s strong creditworthiness and economic stabilityread more and using the proceeds to pay off the remaining unsecured debt.

The main aim is to lower the interest rate on the debt you owe, allowing the individual to pay less in interest charges and pay more on paying down debt. Unlike bankruptcy, debt consolidation may positively affect the credit score.

Bankruptcy vs Debt Consolidation Infographics

Let us see the top differences between bankruptcy and debt consolidation.

Key Differences

  • The bankruptcy process has a very harsh impact on your credit score. While using the debt consolidation process may positively affect your credit score.Bankruptcy does not allow the debtor to lower its overall monthly payment. In debt consolidation, the debtor has the advantage of reducing its overall monthly payment.The advantage of choosing bankruptcy is that they can file for Chapter 7 bankruptcy to consolidate some debt or even dispose of their debt amounts. However, even though the debtor can take a new loan to repay its debt amount, they cannot wipe off their debt completely, as they are still responsible for paying off the new debt amount.According to the bankruptcy chapters, the length of a process for Chapter 7 is up to six months, and in Chapter 13, the process takes about 3 to 5 years. However, in the debt consolidation process, the duration is from several months to years, depending on the term of a debt consolidation loan.The tax owed by the debtor is refunded, but the money is delayed, and when the debts are discharged when the debtor needs to pay tax. Therefore, there are no consequences of a tax on debt consolidation.

Bankruptcy vs Debt Consolidation Comparative Table

Conclusion

If you are looking at restructuring debt, deciding between debt consolidation and bankruptcy may seem like a choice. Bankruptcy allows you to avoid paying the full debt, which is an easy way out. However, one should also consider the negative effects. Bankruptcy can be opted for if an individual cannot make minimum payments every month or if the total unsecured debt is higher than the annual net income.

Debt consolidation may require more money, but it makes more sense if you plan to make major purchases like a new car or home because bankruptcy may adversely damage your credit score.

This article is a guide to Debt Consolidation vs Bankruptcy. Here, we discuss debt consolidation vs bankruptcy along with infographics and a comparison table. You may also have a look at the following articles: –

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