Debt consolidation companies purport to offer you a way out of financial straits by rolling all of your debts into a single loan or line of credit, thereby simplifying the repayment process. However, there are significant drawbacks that might not make this course of action worthwhile. In fact, filing for bankruptcy may be the better choice when you have poor credit, have no reliable source of income and need to stop debt collection efforts without delay.

Debt consolidation might not solve all your credit problems due to these considerations:

• You will probably need good credit to get a consolidation loan in the first place.
• The loan doesn’t reduce your debt principal and won’t necessarily reduce your interest.
• Missing a payment on the consolidated debt will lower your credit score.
• If the debt consolidation company demands collateral for the loan, you can lose that property if you default.

In short, debt consolidation might turn out to be a bad deal for you, if you qualify at all. On the other hand, although bankruptcy will temporarily reduce your credit score, it has some advantages that more than make up for it.

Chapter 13 bankruptcy allows you to repay your debts under a three- to five-year installment plan, but unlike normal debt consolidation, it offers these features:

• An automatic stay immediately stops all debt collection except in the bankruptcy proceeding.
• The court-ordered repayment plan usually reduces the amount you need to pay.
• Your repayment obligation is limited to the specified three to five years.
• Once you complete the repayments, the bankruptcy court will discharge the remainder of your unsecured debts.

Chapter 7 bankruptcy is intended for debtors who can’t afford to repay their debts. It eliminates many or all of your debts in a matter of months and also imposes an automatic stay. Some of your property might have to be sold off to pay off what you owe, but you have the right to exempt certain property from sale. These exemptions often allow a Chapter 7 debtor to keep all of their property while discharging most or all of their debts.

The Law Offices of James C. Zimmerman can give you reliable advice on the advantages and disadvantages of debt consolidation and bankruptcy as they apply to your situation. Call us at 973-764-1633 or contact us online to schedule a free consultation at any of our five offices in northern New Jersey, conveniently located in Vernon, Wayne, Pompton Lakes, Hackensack and Nutley.