Debt Consolidation vs. Bankruptcy: Which is Best for You

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Whether bad household budgeting, job loss, or divorce is the cause of a financial crisis, the problem will not go away by itself. Consumers are generally faced with one of two options: debt consolidation or bankruptcy. Both are stressful and neither is particularly enjoyable to go through. The following will help you determine which route is best for you.

Bankruptcy and Student Loans

The Bankruptcy and Insolvency Act (BIA), which regulates bankruptcies in Canada, was enacted to relieve debtors of excessive financial obligations. Credit cards are the primary culprits of insurmountable debt, while student loans are a close second. The BIA was amended in 1997 to include student loan debt as a dischargeable obligation.1 The one requirement is that the loans must be at least seven years old to be discharged.2 The only debts which cannot be discharged with bankruptcy are back taxes, alimony and child support. The downside to bankruptcy is that the negative information will remain on your credit reports for six to 10 years, depending on your province of residence.3 This will make it extremely difficult to obtain any new loans, buy a car, and in some cases, to get a job. Bankruptcy can be done without a lawyer for those who are savvy enough to read instructions and fill out forms. Otherwise, attorneys charge anywhere from $200 all the way into the thousands to handle bankruptcy cases.3

Debt Consolidation

There are several different types of programs that fall under the umbrella of "debt consolidation." In some cases, a financial institution grants the debtor a loan for an amount large enough to pay off all outstanding debts. This includes all credit cards, mortgages, car notes, and even cash advances through sites such as ServeUCash.ca. The consumer then has just one payment obligation per month. The interest rates on consolidation loans are generally lower than the average credit card, and the monthly payment is much lower than the total of all previous debts. One major caveat is that debtors may once again have access to all their previous accounts that were just paid off by the loan. This could tempt some individuals to use the cards and repeat the cycle. The bank which extends the consolidation loan will not be near as flexible as credit card companies are with monthly obligations. Missed payments could mean wage garnishments and liens being placed on your property.4

What Should You Do?

There is no right or wrong answer as far as which option is best for your situation. If most of your debt consists of taxes and alimony, bankruptcy will do you no good. If you've lost your job, home, and have no means of paying anything, debt consolidation is not an option. There are many credit counseling services that offer free or very inexpensive assessments of your situation that can help you determine your course of action.

1 http://www.bankruptcy-canada.ca/bankruptcy/bankruptcy-act.htm

2 http://laws-lois.justice.gc.ca/eng/acts/B-3/

3 http://student-loan-bankruptcy.ca/

4 http://blog.equifax.com/credit/faq-how-long-does-information-stay-on-my-credit-report/

5 http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02156.html

Peter Hearst A broker for small businesses and restaurants, Peter writes for several business and finance blogs in the U.S. as well as in Australia.