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Choosing Between Bankruptcy and Debt Consolidation

    1. Prevent bankruptcy through debt consolidation
    2. Pros of debt consolidation

When the borrower is asked a question which is better bankruptcy or debt consolidation, the answer is often quite obvious. No borrower is really keep on proclaiming himself or herself bankrupt, if there are legal financial ways to avoid it. In a snapshot, there are two strategies of reducing your debt exposure.


One is to save and live on a minimum spending for significant period of time or arrange consolidated debt. Saving is not really a feasible option is your debt levels are way too high and APR payments are large. Consolidated debt, in turn, would allow you to repay existing debt, reduce monthly interest payments and increase the maturity of the loan as per Graph 1. However, there are downsides, such as putting your property at risk as it would be used as collateral for consolidated loan.


Even though debt consolidation would save you from actual official bankruptcy, it would still label you as a person close 99.99% to bankruptcy. The research conducted by two largest mortgage providers in United States state that applying for debt consolidation is just other form stating that the borrower is bankrupt. From this perspective it is almost impossible to stay which is better bankruptcy or debt consolidation, since, at the end of the day, the only thing that changed about your debt exposure after the arrangement of consolidated debt is the maturity and the form of your debt. The maturity of the debt increased and unsecured debts became secured, as a result of collateral placed to back the loan in order to achieve better terms and conditions.

Debt Consolidation as One Loan

Graph 1: Debt Consolidation as One Loan with Lower Average APR



From the perspective of improving credit history, debt consolidation is definitely better than filing for bankruptcy, as it keeps you on float as long as you are able to stick to your financial obligations and pay monthly interest instalments. Only under this condition, debt consolidation is relatively good for you. Though, if you fail on the payments, you not only file for bankruptcy, but also lose your house, which probably is the largest asset you possess in your life.


According to the credit card research conducted in United States, young people are the main target group to be exposed to the abuse of cheap and affordable borrowing and, thus, are hit the most comparing to other age groups in United States. Over decade from early 90s to early 2001, the percentage of credit card borrowings by young Americans increased by almost 55%.


Moreover, the average young family spend almost 25% of their income on repaying credit card debts. Yet, elder American population increased their credit cards debt by almost 90% for the same period, which is worrying especially in the outline of current economic crisis. The demand for consolidated loans comes mainly from these two groups in United States as well as bankruptcy filing.


The problem is that both young and elderly are very often hit the most by the consequences of the crisis such as job cuts and, thus, are the most vulnerable groups. Moreover, elderly have probably already repaid some part of their mortgages, while young ones do not have solid collateral to back their consolidated loan. This means that chance of filing for bankruptcy by young borrowers is much higher than by elderly. Regardless of which group you belong to as a borrower, if you are faced with the perspective of filing for bankruptcy, it is wiser to arrange consolidated loan if you are eligible for it.


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