Debt Consolidation vs. Bankruptcy in Denver: Cons of Both Options

Read cons of debt relief and bankruptcy in Colorado.

[pullquote align=”center” textalign=”center” width=”100%”]Read part one of this series – the benefits of both debt consolidation and bankruptcy.[/pullquote]

Last week we discussed the benefits of both debt consolidation and bankruptcy in Denver, Littleton, and Aurora. This week, I want to discuss the cons of both options. As an experienced debt relief and bankruptcy lawyer, I have helped hundreds of families overcome overwhelming debt through debt relief and bankruptcy. I hope this blog post sheds some light on whether debt consolidation or bankruptcy is the right option for you:

Debt Consolidation

Last week we discussed how debt consolidation is the process where debt payments are organized into one, single payment (an unsecured or secured loan) with the same interest rate. Here are the negative effects of debt consolidation in Parker, Greenwood Village, and Lone Tree (read about the benefits of debt consolidation here):

Debt Consolidation Cons:

Loss of Home or Cars: Debt consolidation isn’t without its downsides. If your property (such as your home or car) was used as collateral for your debt consolidation loan, and you default on the loan, you could lose your property. There are other ways you could lose your property, such as a cross-collateralization clause which could be present if your car loan is through the same people as your debt consolidation loan. If you default on your debt consolidation loan, but not on your car payment, you could still lose the car.

Tax Consequences: Another downside to debt consolidation is the IRS could consider any money you save through relief services (debt consolidation) as income. This means you would have to pay taxes on it. Often, credit card companies report settled debt to the IRS – they consider these savings to be income.

Hidden Fees and Costs: Lower monthly payments and interest rates are appealing, but debt consolidation could cost you much more money in the long run. For example, lower monthly payments and interest rates usually mean an extended repayment period – the longer you stay in debt, the more you may be paying in the long run.

Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

As we discussed in last week’s blog posts, bankruptcy allows a filer to eliminate and or restructure debt while under the protection of the federal bankruptcy court (read more about Chapter 7 and Chapter 13 bankruptcy in Thornton, Centennial, and Highlands Ranch). Here are the negative effects of bankruptcy (read about the benefits of bankruptcy here):

Bankruptcy Cons:

Reputation and Privacy Loss: Bankruptcy will show up on your credit report. So, if your employer decides to pull your credit history, they will learn about your bankruptcy case. They may also learn about your bankruptcy if your Chapter 13 payments are completed through payroll deductions (employers are not allowed to fire you for a bankruptcy, although they can choose to not hire you). Your family and friends aren’t likely to find out about your bankruptcy unless you owe them money.

Negative Impact on Credit Score: When you file for bankruptcy, it lowers your credit score. It will remain on your credit history for seven to ten years, depending on the type of bankruptcy. People are often concerned about bankruptcy’s impact on their credit, but I point out that if they have a significant amount of debt, they most likely have a poor credit rating anyway. Once you have filed for bankruptcy, you will have a fresh start – a clean slate on which to build a new credit score. Some creditors actively solicit people who have filed for bankruptcy, because they know there are time limits on filing again.

Some Sacrifices May Be Necessary: In order to qualify for bankruptcy, you may have to make sacrifices, such as giving up nonessential or luxury items. Or, you may have to be on a strict budget in a Chapter 13 bankruptcy case and won’t be able to obtain credit without the court’s permission. If you are struggling with overwhelming debt, however, these sacrifices may be necessary to get a fresh start in life.

We hope you have benefitted from the discussion about the pros and cons of debt consolidation and bankruptcy. If you have any questions regarding debt relief, don’t hesitate to contact me. I have helped hundreds of families get freedom from overwhelming debt.

If you are considering debt consolidation or bankruptcy, don’t hesitate to contact experienced bankruptcy lawyer Barry Arrington. He has helped countless families in Littleton, Aurora, and Centennial gain financial freedom through Chapter 7 and Chapter 13 bankruptcy. Contact him for a free consultation at 303-205-7870, or submit the “Get Bankruptcy Help Now” form.