With the economy still chugging along at a sluggish pace, many consumers are facing overwhelming debt.
In fact, total outstanding consumer debt reached $2.5 trillion in August 2009, according to the U.S. Federal Reserve.
When faced with so much debt, many consumers feel trapped in a corner, not knowing where to turn. Many debtors consider bankruptcy, thinking this move will give them a fresh start. Others look to debt consolidation as a way out of their financial woes.
Filing for bankruptcy is a major financial move that should not be taken lightly.
The idea behind filing for bankruptcy is an individual can purge a significant amount of debt through the courts. Often, filing for bankruptcy allows the debtor to settle his or her debts at a lower financial cost than by paying the debts outright. Additionally, filing for bankruptcy means that creditors can no longer hound the debtor for his or her outstanding debts.
However, filing for bankruptcy brings with it several consequences that should be weighed against any immediate benefits.
For one, a bankruptcy can have a significant impact on your credit report and will remain there for seven to 10 years. Additionally, you will probably need to give up many of your assets in the bankruptcy settlement.
There are two types of bankruptcy one can file, each with its own rule regarding the handling of the debtor's assets.
Through Chapter 7 bankruptcy, which stays on your credit report for 10 years, a court trustee collects the assets of the debtor's estates, reduces them to cash and makes distributions to creditors. Some of the debtor's assets are protected by state exemptions, but not as many as most consumers might think.
Under New York law, individuals who file bankruptcy are able to retain their home but only up to $10,000 in equity. They also are able to keep one vehicle, but only up to $2,400 in equity in that vehicle. If you have greater equity in these types of possessions, the court could make you liquidate them and essentially trade down.
Debtors also can file Chapter 13 bankruptcy, which can benefit debtors who do own valuable assets that are not completely covered by exemptions, such as a home. By filing Chapter 13 bankruptcy, debtors agree to repay creditors over three to five years. Chapter 13 bankruptcy stays on your credit report for seven years.
Another option available to those drowning in debt is debt consolidation. Through this option, debtors can either take out a debt consolidation loan or work with a debt consolidation program to pay down their debts quickly.
Typically, through debt consolidation, individuals also can reduce their monthly payments and decrease the amount of interest they pay over the long term.
It is important to note that debt consolidation is not a quick fix. It will still take time to pay down your debt. However, you will be able to hold on to your assets if you choose to do so and your credit will not be impacted to such a degree.
