DEBT CONSOLIDATION VS. BANKRUPTCY
Jan. 12, 2021
According to statistics from the U.S. Bankruptcy Court, Central District of California, more than 30,000 individuals file for bankruptcy protection each year in Los Angeles County and Orange County combined. Though there has been a slight downward trend in the past few years, no one can be sure of the effect that the pandemic lockdown will have on these statistics when all is said and done.
If you find yourself facing serious debt problems, or a debt load that exceeds your ability to pay, bankruptcy is one option that may be able to help you end the nightmare. Of course, another option is debt consolidation — but which option is better for you? What are the pros and cons of each?
If you live in Los Angeles County or Orange County, or any of the neighboring areas, you can find the answers you’re looking for by contacting The Orantes Law Firm. Our bankruptcy and estate planning team has been helping clients facing seemingly insurmountable debt for the past two decades, and we would be proud to offer our services to you.
YOUR OPTIONS UNDER THE BANKRUPTCY CODE
Some people shudder at the thought of filing for bankruptcy, not just because of the stigma, but also because they fear it means losing everything. For many individuals and families, both Chapter 13 and Chapter 7 of the bankruptcy code offer debt relief and a fresh start, but in different ways. Both, however, protect – or exempt – many items from bankruptcy seizure and sale.
In both chapters, the bankruptcy code provides exemptions for many possessions, including homes, cars, furnishings, clothing, certain tools of your trade, and retirement savings.
CHAPTER 13 BANKRUPTCY
Chapter 13 allows you to reorganize and repay your debts over a three- to five-year period, often with the debt load reduced. Once you’ve finished the repayment plan, you will be discharged from bankruptcy, though it will stay on your credit report for up to seven years from the time of filing.
CHAPTER 7 BANKRUPTCY
Chapter 7 is a liquidation plan that can involve selling off some of your nonexempt assets. You will be discharged from bankruptcy as soon as the trustee and court process is over, though the notation will stay on your credit record for 10 years.
THE PROS AND CONS OF EACH
The pros of filing for bankruptcy include an immediate end to harassing phone calls and debt collection efforts, as well as offering you a fresh start. With Chapter 7, your debts are wiped out with the discharge. Under Chapter 13, your debts will be paid off at a more affordable rate and in quicker order.
The cons, of course, include hits to your credit record. Under Chapter 13, you cannot assume any new debt while repaying your obligation without the court’s permission. Under Chapter 7, which involves liquidation, you could lose some nonexempt assets to court-ordered sales, but once you’ve been discharged, you can once again seek credit purchases (though this may be difficult and more costly when it comes to securing an interest rate).
Finally, there is the possibility of taking a hit to your reputation, especially if someone like your employer pulls your credit report, or if you owe money to family or friends.
YOUR OPTIONS UNDER
On the surface, debt consolidation may sound like a less tedious version of Chapter 13. A credit repair agency may be able to reduce some of your bills and consolidate them into one debt. You also will have the advantage of just making one payment in lieu of multiple payments each month. However, not everything is always so rosy beneath the surface.
The consolidation might require you to provide collateral with a loan secured against your home or your automobile. If you miss some payments, you could lose your home or car. Also, the payoff period is not as friendly as Chapter 13’s three to five-year period. It could take many years to pay things off, and as a result, you could end up paying more than you originally owed. All in all, this could lead to a much longer journey towards the fresh start that you seek.
Finally, you may be hit by additional taxes from the IRS. If your debt load is reduced, the amount by which it’s reduced is called settled debt, which the IRS considers income. Credit card companies will often report settled debt to the IRS, who then may come calling.
WHICH OPTION IS RIGHT FOR ME?
The truth is, there are many pros and cons to consider when deciding between bankruptcy and debt consolidation. A prime consideration, as always, is that bankruptcy is a legal process during which you are protected from those trying to take advantage of you. Private debt consolidation does not have the full force of a U.S. court standing behind it, and you can end up with unforeseen consequences while you attempt to work to pay off your debts.
GET RELIABLE GUIDANCE FROM THE ORANTES LAW FIRM
Regardless of the circumstances of your case, you shouldn’t have to go it alone when considering your options and making a decision about your financial future. Allow our experienced team at The Orantes Law Firm to consult with you, assess the unique details of your situation, and clearly explain all of the legal options at your disposal. After all, we’ve been successfully helping clients seek debt relief for over 20 years. With a proven track record of success, we’re proud to offer that same knowledge and experience to you and your family.
The Orantes Law Firm serves clients throughout Los Angeles County and Orange County. Whether you live in the city of Los Angeles, Irvine, or elsewhere, call us today to schedule a one-on-one consultation and learn more about how we can help you take that first step toward a fresh start.