Although the country has been on the mend from 2009's "Great Recession," there are still a lot of people reeling from a financial standpoint. If you're under water in debt, however, there are a couple of routes that you can take to get back to where you want to be. Arguably the two most popular of these strategies are debt consolidation and filing for bankruptcy protection. Here's a look at the basics, as well as the pros and cons of each route:
Debt Consolidation: What You Need to Know
Simply put, debt consolidation is a way of reorganizing multiple debt payments into one, more manageable payment. It can be done either through a secured or an unsecured loan. The big advantage is that you can actually save money by going this route and protect your credit score. Here's a look at some of the other pros:
You maintain access to credit: Not only will your credit score be protected, but you'll also have continuing access to it.
It keeps debt management simple: Say goodbye to keeping track of multiple payments and say hello to one total payment.
Save money: We already hinted at this one, but consolidating debt can actually help you secure an overall lower interest rate compared to what you were paying previously. This means you'll likely have more money every month to pay towards this debt, or other expenses.
Although debt consolidation has several advantages, it does have some disadvantages. Here's a look:
You may lose possessions: You might have to put collateral toward the loan, such as your home or a car, which you could lose if you default on payments.
Hidden costs: Often times, debt consolidation loans extend the length of the loan to make payments more manageable, so while you save money per payment, you could spend more in the long run. You also may have to pay taxes on the money you save from consolidation.
Bankruptcy: What You Need to Know
When people think "bankruptcy," they immediately think of the cons. And there are several, such as the big hit it takes on your credit score for 7-10 years, how you may have to surrender possessions and how the filing becomes public information, available for anyone to attain should they so choose. But bankruptcy also has some big advantages. Here's a look:
Protection from creditors: They'll be no more threats of lawsuits or harassing phone calls from creditors, due to the protection of automatic stay.
Fresh start: While bankruptcy takes a hit on your credit score, it also permits a fresh start. After eliminating unsecured debt and emerging from bankruptcy protection, you essentially get a fresh financial start. For someone who is way in over their head financially, this fresh start can be welcome relief.
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