If you live in New York or New Jersey and are in debt, you are not alone. According to Experian’s 2018 annual study on the state of credit and debt in America, the average American has a credit card balance of $6,375.00, which has gone up three percent since the previous year. 

Many New York and New Jersey clients who come to our office, often find themselves asking whether they should sign up for a  Debt Consolidation program or file Bankruptcy. More times than not, I usually find myself recommending to most of my clients that Bankruptcy is the better option for them.

What is The Difference Between Debt Consolidation and Bankruptcy?

First, let me explain what the difference between Bankruptcy and Debt Consolidation is. Bankruptcy is a tool that allows your debt to be discharged. Depending which chapter you qualify for either a Chapter 7 or Chapter 13 will determine how the process works. In a Chapter 7 Bankruptcy most of your debt is discharged and usually you do not have to pay your creditors back. In a Chapter 13 Bankruptcy you pay your creditors back over a five year plan with no interest. Debt consolidation on the other hand,  is where you take out more debt  (a loan) to consolidate all of your current debt. You may get a lower interest rate by consolidating your debt but, in order to get a lower interest rate, the loan must be secured by your assets, usually your home equity, thus, putting your home at risk if you fail to pay your payments. 

Why Is Bankruptcy Usually the Better Option?

First, many fail to realize that most debt consolidation companies work for the creditors. They try to get you to take out a loan to pay off your other debt. It somewhat seems, backwards that you would take out more debt to pay debt you already have. They may be able to lower your interest rates or payments but most of the time you will end up paying back your creditors in full. 

When people usually come to us they are already in financial distress and can no longer keep up with their monthly payments. If your income is not enough to cover your monthly bills and you really have no excess income then you should consider filing bankruptcy because doing debt consolidation will  still leave you with monthly payments. By filing Bankruptcy you have the advantage to either have no payments by filing a Chapter 7, or small payments in a Chapter 13. 

Another thing to consider is retirement. Many people fail to think about this because they are more concerned with getting out of debt. It is important to think about how much you should be putting away for your retirement each month. Many times people who have debt do not have the means to put anything aside. If your debt gets discharged in a Chapter 7 Bankruptcy it  will allow you to begin saving for retirement much sooner. 

Taxes is also something to consider. In a bankruptcy you will not have any tax liability for the portion of the debt that was discharged. Whereas, debt consolidation companies may forgive you for some of the loan but, you may be held liable for taxes due for on the forgiven amount. 

A debt consolidation program, depending on the amount of debt you have, can take years to pay off. Although, you may be able to afford the monthly payment at the beginning, as soon as some unforeseen circumstance arises, such as someone getting ill, losing a job, divorce or some other unexpected event, it could cause you to fall behind on your monthly debt consolidation payments. Thus, putting you back in the same position you were in, prior to signing up for the debt consolidation program. 

Further, many times these debt consolidation companies are scams. It is important that you do research to make sure that the company you are working with is reputable. Do your research thoroughly. 

Questions to Ask Yourself to Determine if you Should File Bankruptcy? 

• Is your debt more than 40 percent of your income? 
• Are you able to make your minimum monthly payments? 
• Are you taking out more debt to pay for your current debt?
• Are you being sued by any creditors?
• Have Any creditors gotten judgments against you?
• Are Any creditors garnishing your wages?
• Has your car been repossessed?
• Have your bank Accounts been levied upon?
• Have you missed any payments on your mortgage or credit cards?
• Is your home in foreclosure?

If your answer to any of these questions was “yes” then filing for bankruptcy may be the best option. Give us a call today at 973-979-9078. One of our Bankruptcy attorneys would be happy to go over your options. We have weekend and evening appointments to accommodate your schedule and we will even come to you, if you can’t come to us!