Bankruptcy Versus Debt Consolidation: A Detailed Examination
March 15, 2010 5:16 pmAh, Bankruptcy. How terrible of you! Society, friends, and neighbors boo you. Debt consolidators tell you this as they promote their program.
But what are the real issues with bankruptcy vs. debt consolidation?
1. Your credit score
2. Getting rid of your debts
3. Keeping critical assets
Let’s closely examine what happens to your credit score in bankruptcy vs. debt consolidation. In both cases, your credit score will suffer tremendously.
IMPORTANT: Because this is a detailed examination, please read my previous blog: “Credit Score Perils of Debt Consolidation.”
Three Essential Rules to Understand About Bankruptcy:
- Rule #1: Bankruptcy stays on your credit report for ten years. True, but see rule #2.
- Rule #2: Credit scoring considers a bankruptcy mainly for two years.
- Rule #3: Many creditors deem bankruptcy a fresh start with debt cleared away for their lending.
Here is our sample starting point: Your credit score is 700, you have a stable job, and you pay your bills on time. Suddenly you lose your job, use up your savings, and start to fall further behind on your bills. Creditors are pounding you, and you have to do something. Your credit score is now 590.
At this point, you’re considering bankruptcy chapter 7: liquidation of debts, bankruptcy chapter 13: restructuring your debts or using a debt consolidator.
Let’s Chart the Differences
| BK Chapter 7 liquidation | BK Chapter 13 reorganization | Debt Consolidation | |
| Duration of program | 5 months avg. | 4 years avg. | 3 years avg. |
| Immediate effect on creditors | Stops all collections, liens, or garnishments | Stops all collections, liens, or garnishments | Nothing, negotiations with your creditors, begin after your fee period, usually six to eight months. Your creditors are alerted, but there’s no legal effect, and collections continue. |
| Cost | Low | Medium | High |
| Getting rid of unsecured debts | Yes | 40% reduction with payment plan | 60% reduction with payment plan |
| Secured assets | Liquidated | Restructured payments | Not addressed |
| Future creditors viewpoint | May creditors see it as a fresh start. | Creditors see it as a cautious fresh start. Your payment plan gets scrutinized. | Disadvantage. Remember your creditors must wait until you pay your fee period. |
| When can your credit score start to recover? | 6 months avg. | 6 months avg. | 18 months or ½ the duration, on avg. |
| credit score before problems | 700 | 700 | 700 |
| credit score after problems | 590 | 590 | 590 |
| credit score 30 days after filing | 545 | 545 | 545 |
| credit score 9 months after filing, with moderate new debt, assumed and on-time payments | 610 | 575 credit score growth stalls because your debt-to-income ratio includes your bk13 payments | 545 can’t get new loans or debt yet |
| credit score 12 months after filing, same criteria | 635 | 605 | 545 can’t get new loans or debt yet |
| credit score 18 months after filing, same criteria | 660 | 640 | 545 can’t get new loans or debt yet |
| credit score 24 months after filing, same criteria | 670 | 660 | 575 |
| credit score 36 months after filing, same criteria | 670 | 685 a bit higher because you’re nearing the end of your bk13 payment program | 630 |
This chart is only an example, and each individual varies. There are no specific recommendations.
What to Consider When You Choose a Program
- The immediate effect on your creditors
- The duration of the program
- The reduction of your debts
- Your credit score
My first recommendation is to use the Action Buttons on SmartCredit.com to negotiate your debt directly. This approach can take you out of your debt with minimum credit score and financial impact. Then, if you must, do either bankruptcy or debt consolidation and give serious thought to the credit score effect.
David B. Coulter – founder and CEO of SmartCredit®
Tags: Bankruptcy, credit resources, Credit Score Improvement, credit score recovery, Credit Scoring, Debt, Debt Consolidation, Financial Stress, Getting Credit, Settle DebtCategorised in: Bankruptcy, Credit Score, Debt, Debt Consolidation, Improving Credit, Money & Identity
This post was written by David B. Coulter
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