Many years ago, in what seems like another life-time, I royally screwed up my credit. At the time, I had three options; 1.) file for bankruptcy, 2.) apply for a debt consolidation loan, or 3.) ignore my credit problems until they went away.
At first, I thought about filing for bankruptcy. However, I didn’t like the fact that I’d have to wait at least 7 to 10 years before my credit improved. To me that sounded like an eternity. Though bankruptcy was definitely an option for me, having amassed a small fortune in credit card debt, I was just too stubborn to actually go through with it.
Next, I applied for a debt consolidation loan. But since I wasn’t ready to truly confront my budgeting issues and resolve my debts; this option turned out to be more of a headache than a solution. I eventually defaulted on the consolidation loan as well, continuing my pattern of irresponsibility.
Finally, what I decided to do, or not decided to do depending on how you look at it, was ignore my problems with the hopes that they’d magically disappear. Of course, this was an infantile way to resolve my problems. I avoided collectors’ calls, I discarded late-payment letters, eventually my debt was turned over to numerous collection agencies that made my credit report look like a complex flow-chart making it difficult for me to match up the original debt with the current collection agency.
To make a long story short, I ended up “waiting” 7 years to clean up my credit. Thankfully, during those 7 years I began to develop a basic understanding of budgeting and responsible credit usage. That allowed me to build a positive credit history while I waited to dispute my old negative credit items.
Since I didn’t own a house or a car in my name (meaning there was nothing to liquidate), ignoring my debt issues ended the same way a bankruptcy would have resolved my debt issues; which brings me to comparing and contrasting bankruptcy vs. debt consolidation.
There are two types of personal bankruptcy; Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is a complete liquidation of all assets that are turned over to the courts to pay the debtors. In most cases, the remaining debt is written off. A Chapter 13 bankruptcy allows you to keep some of your assets, but sets up a payment plan with your debtors. Here is a quick summary of bankruptcy:
- Bankruptcy filings are not free – most filing fees range around $300
- Paper work is crucial – gathering all of the needed paperwork takes time and you need to know what to gather: a credit report, all of your debtor information, and your tax returns as an example.
- Credit score – a bankruptcy can stay on your report up to 10 years. Though you can rebuild your score during this time, you most likely won’t receive the best interest rates until the bankruptcy is completely removed.
An alternative to filing for bankruptcy is to sign up for a debt consolidation loan. The loan company negotiates lower interest rates with your original debtors and creates one combined payment you make to them and they distribute the payments to your debtors. The key to successfully making this loan work is creating a reasonable budget making sure you can pay the monthly payment. Some key points about debt consolidation:
- One payment instead of multiple payments – this is one of the benefits of a consolidation loan; instead of keeping track of all of your payments, there is only one to make.
- Lower interest rates for a fee – most debt consolidation companies negotiate lower interest rates with your original debtors, but this normally isn’t free of charge. The fees are rolled into your monthly payment.
- Responsibility – without any budgeting or money management skills, the possibility of reverting back to skipping payments is greater than 50%.
I learned money management lessons through the school of hard knocks and can now say my credit is in the “excellent” range. Though for anyone in a similar situation, be sure to weigh all of your options and learn how to create a budget. Which is the lesser of two evils? I’ll let you decide.