Eliminating debts is always a worthy goal. Once paid, cash flow increases and collateral is safe beyond the reach of almost all prior creditors. In a perfect world, everyone would have a great job and make all payments on time. In reality, unemployment, medical emergencies, divorce or any unexpected emergency may derail the best intentions. In sever situations, many struggling debtors consider both debt consolidation programs and filing bankruptcy. Understanding the differences between these two options is essential to maximize a financial recovery.
Filing bankruptcy requires a federal lawsuit. Once filed, a debtor’s estate is placed under the supervision of an Assistant U.S. Trustee. The trustee acquires almost unlimited authority to administer all assets owned by a debtor. Only specifically exempted assets are retained while all nonexempt assets are liquidated for distribution to creditors. In addition, all debts are included when filing and must be disclosed to the court.
Filing bankruptcy is intrusive. The trustee that administers each case must thoroughly investigate an extensive array of financial transactions. The investigation may range back in time for up to 10 years involving trust transactions. In all cases, transactions occurring within the last two years receive a high level of scrutiny.
A meeting with creditors is mandatory in all bankruptcy cases. During the meeting, debtors are placed under oath. All creditors may attend and ask any relevant question. A mistake when providing sworn testimony subjects debtors to the pains of perjury.
Debt consolidation plans are voluntary. Both borrowers and lenders are free to participate if deciding to do so. Filing a lawsuit is not required. Assets are not subject to government seizure. In addition, only specifically included accounts are relevant to the administration of the plan. Other loans and accounts are not altered.
Debt consolidation plans provide a less sever solution for cash flow emergencies. Necessarily, plan participants must have a regular income in order to make monthly payments. For example, loans, management plans and settlement plans all require regular payments in the future. In the case of settlement plans, future payments may be discounted by agreement and require repayment of only a portion of principal owed.
Enrolling in a voluntary program does not affect future credit availability or FICO scores as much as filing bankruptcy. Voluntary participation may initially decrease FICO scores to a small degree. Each month that payments are made on time improves credit ratings after the initial drop. When filing bankruptcy, credit ratings plummet and are affected for 10 years.
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