Bankruptcy or Debt Consolidation: Which Is Better for You? (Experian)

If your debts are becoming unmanageable, bankruptcy and debt consolidation are two remedies to consider. While debt consolidation is significantly less damaging to your credit, it’s not possible for everyone. If you’re getting overwhelmed with debt, here’s a rundown on which option may be better for you.

What Is Bankruptcy?

Bankruptcy is a legal process[1], overseen by federal courts, that’s designed to protect individuals and businesses overwhelmed with debt. The two types of bankruptcy that apply to individuals are Chapter 7, also known as liquidation bankruptcy, and Chapter 13, or reorganization bankruptcy.

Both Chapter 7 and Chapter 13 bankruptcies can effectively erase, or discharge, many types of debt, including outstanding credit card balances, unpaid rent and utility bills, and private debts between you and friends or family members.

Bankruptcy cannot discharge all debts, however. Obligations excluded from discharge through bankruptcy include criminal fines, court-ordered alimony and child support payments, and unpaid taxes.

Bankruptcy also doesn’t prevent mortgage lenders and auto financing companies, and other issuers of secured loans (those that use property as collateral), from foreclosing on or repossessing the property if you still owe money on it.

Chapter 7 Bankruptcy

Under Chapter 7 bankruptcy[2], a court-appointed trustee supervises the liquidation of your assets—with certain exceptions, including up to a certain amount of equity in your primary vehicle, work-related tools and equipment, and basic household goods and furnishings. Proceeds of the liquidation go to your creditors. With some exceptions, outstanding debt that remains is eliminated, or discharged, when your bankruptcy is finalized.

Consequences of a Chapter 7 bankruptcy are significant: You will likely lose property, and the bankruptcy will remain on your credit report for 10 years. Should you get into debt again, you cannot file again for bankruptcy under Chapter 7 for eight years after your initial filing.

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