Debt Consolidation Loans vs Bankruptcy
There are other options you can pursue when bankruptcy is not the best alternative. In most cases it is your assets and employment situation that determines whether these alternatives are available for you. Eliminating your debt through bankruptcy offers you the opportunity to avoid paying the loan in full but it can be complicated and time consuming.
Bankruptcy in Texas
A Chapter 7 bankruptcy offers hope of a fresh, stress free start. But you may lose your home if it has more equity than can be protected with your Texas home exemption. To keep your home you will have to create a payment plan under Chapter 13 bankruptcy.
Pursue the debt consolidation option first before you file a Chapter 13 bankruptcy to keep your home.
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Debt Consolidation
As an alternative to bankruptcy, you can decide to consolidate your payments through a credit counseling service or through a debt consolidation loan. You can go for a debt consolidation loan that is secured by equity in your home or choose one that is not. The consolidation loan that is not secured is often meant to help you simply pay off your debt.
The process involves you making one monthly payment to a consolidation company, and then they take care of the debt with your creditors. Another option is consolidating your debt through a second mortgage or home equity line of credit, which may help lower your cost of credit. While this may improve your financial circumstances, this loan will require your home as collateral.
That means that if your payments are late or you can’t make payments, your home can be foreclosed. If your unpaid debts remain on separate credit cards, you cannot lose your home. It is important to consider this option if your home has more equity than can be protected by your Texas home exemptions.
Remember that debt consolidation does not reduce your debt. It only makes you feel like your burden has been lifted because you only have one account to pay. It is a great option if the final consolidated debt has lower monthly interest rate or a lower monthly payment.
The lower monthly interest rate and monthly payments is achieved by lengthening your monthly debt payment. This means you will pay back the debt for longer than it would take if you did not consolidate your debt. You also end up paying more interest because of the longer payment period.
Debt consolidation may not be the best option if it just treats the symptoms and not the problem. For example, if a debtor’s overspending is what is causing monthly shortfalls, then debt consolidation would just be delaying financial doom.
You also need to know that using debt consolidation companies is risky because the industry is full of scams. Some companies may fail to send your monthly payments to creditors while others may convince you to get a high interest loan. You need to speak to a dedicated attorney, who is experienced and resourceful, before deciding on bankruptcy or debt consolidation.
