Debt consolidation companies spend a lot of money creating an image that bankruptcy should be avoided at all costs, but the facts reveal that bankruptcy is a better option for most people a vast majority of the time.
A typical debt consolidation plan requires you to make a single monthly payment to the debt consolidation company in lieu of paying your debts individually. They hold that money for months and even years until there is enough money accumulated to work out settlements with each of your creditors individually. During that time period, you are not making payments to your creditors and your credit score continues to plummet.
Additionally, once you have settled your debt for less than you owe to your creditors, then you will be responsible for paying income taxes on the amount of debt that was cancelled. Example: If you owe $50,000 in credit card debt and you settle that debt for $20,000, then then you will have to pay income taxes on the $30,000 that was cancelled. You will receive a 1099-c (Cancellation of Debt Income) from the creditor, as the creditor must report to the IRS that they cancelled your debt. By contrast, the debt you discharge in bankruptcy is not taxable at all.
The fees you pay to the debt consolidation company are much higher than the cost of filing for bankruptcy and those fees are taken from your monthly payments before they pay any of your creditors.
Your credit score typically recovers faster after filing bankruptcy than it does when you go through a debt consolidation program. This is because your credit score starts going up after your bankruptcy is filed, due in large part to your creditors not being permitted to report your payment history to the credit bureaus after you file your bankruptcy case. Whereas in a debt consolidation program, your creditors will keep reporting your derogatory payment history and that history will remain on your credit report for 7 years after the last payment was made to that creditor.
Bankruptcy offers options that are not available to debt consolidation companies. In bankruptcy there are options to help with mortgage debt, automobile loans and tax debt, in addition to your general unsecured debts such as credit cards, personal loans and medical debt. Also, the bankruptcy code has protections and remedies against creditors that are just not available to debt consolidation companies.
The goal of the Bankruptcy process is to give someone a fresh start on their financial situation. A financial fresh start can be achieved quicker, more efficiently and less costly than with a debt consolidation program.
Before anyone goes into a debt consolidation program, they should speak with an experienced bankruptcy attorney to compare the benefits and drawbacks of both options. Even if you are someone that is currently in a debt consolidation program, it’s not too late to avail yourself to the benefits of the bankruptcy process and bankruptcy would still be a better option a vast majority of the time.
My office provides free consultations, so it won’t cost you anything to compare your options.