IS CONSOLIDATION OF CREDIT CARD DEBT EQUIVALENT TO FILING BANKRUPTCY?

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One of the most important concerns for those who are planning to consolidate their credit card debt is the effect that it will have on the credit report and the credit rating. The common misconception is that consolidating credit card debt will cause the same damage to your credit report and rating as that of filing for bankruptcy. Nothing else is farther from the truth. The ignorance towards consolidation of credit card debt perpetuates such misconceptions. Credit card debt consolidation is one of the best approaches that are available today to debt freedom or a debt free life. Debt consolidation is multi faceted and understanding the different facets will make sure that you understand why this is nothing like bankruptcy.

Bankruptcy is a lawful process that is carried out in the courts of law and is aimed at eliminating or reducing non – secured debt. Bankruptcy will remain on your credit report for a period of 7 years and hence, it will become very difficult for you to get any line of credit in the future. Even the secured loans like mortgages will be renegotiated after you file for bankruptcy. Non – secured loans such as credit card debt and other similar lines of credit are eliminated without the need to pay them back. There are various kinds of bankruptcy; some make an attempt to repay the debt while most of them just aim to eliminate them.

Debt consolidation is completely different from this. It has several different approaches. Debt consolidation, debt settlement and debt management are some of the approaches that are available today. Each method has its advantages and disadvantages.

“Debt management” is also referred to as debt counselling. In this kind of consolidation, your debt payments will be managed by an agency. This method will create the maximum amount of damage to your credit report and ratings. It will not directly affect your credit score; however creditors look at this as a bankruptcy. It implies that you will not be able to or it will be extremely difficult for you to get any credit in the future. If you opt for this method, you will remain in debt for a very long time. There are a few agencies that will charge you fees even though they are not able to manage all your debt.

Debt negotiation and debt settlement is the quickest way to a debt free life. Here, the agency will negotiate a lower amount to be repaid to them. The payments to all the creditors are handled by the agency. However, this method has a negative effect on your credit rating since you are not paying your entire debt. The negative effect will remain only for a short period and will be back to normal when you pay off the debt.

Consolidation your debt is the best choice for you if you are really worried about the debt. It mostly utilises a collateral source like a home. You will get tax exemptions and low interest rates due to this reason.