Bankruptcy vs Debt Consolidation Differences
Bankruptcy is a process where an organization declares that they cannot repay its debt while Debt consolidation is a method of taking out new loans to pay off old debt. In this article, we look at Bankruptcy vs Debt Consolidation in detail.
- Bankruptcy is a legal process where an individual or organization files a petition in court when they are unable to honour its financial obligations or unable to pay their debts. In this legal process, the debtor’s assets are measured and evaluated, and by using the value of these assets the payment is made. There are two main types of bankruptcy – Chapter 7 bankruptcy and Chapter 13 bankruptcy. Chapter 7 refers to as liquidation bankruptcy and Chapter 13 refers to reorganization bankruptcy
- Debt Consolidation is a process of taking out a new loan in order to repay off the debts. In this process, all multiple debts are combined into a single monthly debt which usually has a newer favorable structure in terms of – lower interest rate structure, lower monthly payment, or tenure. This essentially involves applying for an unsecured loan and use 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 have a positive effect on the credit score
Bankruptcy vs Debt Consolidation Infographics
Here we provide you with the top 9 difference between Bankruptcy vs Debt Consolidation
Bankruptcy vs Debt Consolidation – Key Differences
The key differences between Bankruptcy vs Debt Consolidation are as follows –
- Bankruptcy is another way to repay your debts but it is a complicated process when compared to debt consolidation while Debt Consolidation is a less complex process to repay your debts
- Bankruptcy process has a very harsh impact on your credit score while debt consolidation process, you may have a positive effect on your credit score
- Bankruptcy does not allow the debtor to lower its overall monthly payment. In debt consolidation, the debtor has the advantage of lowering its overall monthly payment.
- The advantage for people choosing bankruptcy is that they can file for Chapter 7 bankruptcy, where they could reduce some amount of debt or can even dispose of all of their debt amounts. Even though the debtor is allowed to take a new loan to repay its debt amount, but they cannot wipe off their debt completely, as they are still responsible for paying off new debt amount.
- According to the chapters of bankruptcy, 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. In debt consolidation process the duration is from several months to years, as it depends 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. There are no consequences of a tax on debt consolidation.
Bankruptcy vs Debt Consolidation Head to Head Difference
Let’s now look at the head to head difference between Bankruptcy vs Debt Consolidation
| Basis – Bankruptcy vs Debt Consolidation | Bankruptcy | Debt Consolidation | ||
| Meaning | Bankruptcy is a process where an organization declares that it cannot repay its debt | Debt consolidation is a method of taking out new loans to pay off old debt | ||
| Complexity Level | Bankruptcy is another way to repay your debts but it is a complicated process when compared to debt consolidation. | Debt Consolidation is a less complex process to repay your debts. | ||
| Credit Score | In the bankruptcy process, you can face a negative effect on your credit score. | In debt consolidation process, you may have a positive effect on your credit score. | ||
| Monthly Payment | The debtor is not allowed to lower its overall monthly payment. | In debt consolidation, the debtor has the advantage of lowering its overall monthly payment. | ||
| Debt Free or Reduction Option | The advantage for people choosing bankruptcy is that they can file for Chapter 7 bankruptcy, where they could reduce some amount of debt or can even dispose of all of their debt amounts. | Even though the debtor is allowed to take a new loan to repay its debt amount, but they cannot wipe off their debt completely, as they are still responsible for paying off new debt amount. | ||
| Advantages | 1. When a bankruptcy is filed, it restricts the credits from repossessing your property.
2. The debtor is not taxed by the Internal Revenue Service on the debt which was exempted in the process of bankruptcy. 3. The debtor can reorganize their debts without giving away their property. |
1. The debtor can make one single payment each month to their debt consolidation company.
2. It has flexible options such as lowering your overall monthly payment debt amount. 3. Debt consolidation does not damage the credit score |
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| Disadvantages | 1. Bankruptcy is a difficult process.
2.Damages the credit score. 3. It has tax effects involved in this process |
1. The full amount owed by the debtor needs to be repaid to the creditor.
2. The creditor can file a lawsuit against debtor even if it is accepting payments or working with the debtor. 3. Interest needs to be paid on the debt amount. |
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| Length of Process | According to the chapters of bankruptcy, 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. | In debt consolidation process the duration is from several months to years, as it depends on the term of the debt consolidation loan. | ||
| Tax Effects | 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. | There are no consequences of a tax on debt consolidation. |
Conclusion
If you are looking at restructuring of debt than deciding between debt consolidation and bankruptcy may seem to look like a choice. Bankruptcy allows you to avoid paying the full debt which looks like an easy way out. However, the negative effects should also be considered. Bankruptcy can be opted for if an individual if they can’t 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 are planning to make major purchases like a new car or home because bankruptcy may damage credit score adversely.
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