Debt Consolidation - An Alternative to Bankruptcy

If your credit debt is becoming overwhelming, you've probably thought about declaring bankruptcy. While you may be eligible for a bankruptcy, it may not be the best idea.

Debt consolidation, or debt management, is an option that may be better for you in the long run. Debt consolidation is simpler, less drastic, and less embarrassing for many people who choose it.

How does it work? You work with a third-party to pay off your debt. You're typically assigned a debt counselor. That counselor will work with your credit cards to help lower your interest rates and finance charges.

Usually, your payment with a debt consolidation loan will be lower than your original payments. This may help you free up extra money to pay your basic living expenses.

You may also save money in the long run. With debt management, your creditors will often eliminate future finance charges and interest to give you some breathing room while repaying the debt.

Instead of having multiple lenders to pay back each month, you'll just send one payment to your debt management company. They, in turn, will make payments to your multiple creditors. This simpler method of repaying your debt may also prove to be a relief.

Oftentimes, your creditors will report that you're participating in a debt management program to a credit bureau. While it may seem like a negative item on your credit report, it will not be as negative as declaring bankruptcy.

The cost for debt management is usually a small "handling" fee for each debt. The debt management program will also receive a percentage of the recovered debt from your creditor. On the other hand, declaring bankruptcy requires hiring legal representation and can be quite expensive.

Making a choice between bankruptcy and debt management will largely depend on your personal situation. You may have so much debt that you. re unable to make credit repayments, even in a debt management arrangement.

If this is the case, bankruptcy may be a better solution for you. If, however, you could manage payments under debt consolidation it could save you from the hassle and expense of bankruptcy.

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About the author:

Michael Torrance is a financial consultant with First American Debt Consolidation and Loans, a company specializing in debt consolidation loan alternatives through consumer credit counseling.