Choosing Debt Consolidation Instead Of Bankruptcy? |

People tend to think of consumers who file for bankruptcy as simply looking for an easy way out. But here’s a shocking fact: Only a small percentage of U.S. residents who need bankruptcy actually file for it. Most others handle their debts in other ways, including high-interest-rate debt consolidation loans. It’s true that the U.S. bankruptcy filings could reach 1.7 million this year, according to a recent story in USA Today. But that figure is actually just a fraction of the U.S. residents who need bankruptcy protection, according to the same story. There are many reasons for this: For one thing, filing for bankruptcy has become expensive. For another, many consumers are simply too overwhelmed with debt consolidation loans, high credit card bills and mortgage loans that are now too expensive to consider navigating the bankruptcy process. Instead, they’re simply adding more debt or walking away from their bills.

Expensive Filing

Chapter 7 bankruptcy protection is the one that most debtors want. It erases their debts. However, filing for this kind of bankruptcy protection is far from cheap. The attorney fees for the process now stand at $1,078, according to the U.S. Government Accountability Office. Filing fees for Chapter 7 bankruptcy stand at $299. That’s a lot of money, especially for people who are already deep in debt. At the same time, filing for Chapter 7 bankruptcy protection is a complicated and intimidating process. Many consumers, even if they are struggling mightily with debt, don’t want to go through it. For these consumers, other options, such as debt consolidation loans, seem like the easier solution.

Negative Consequences

There’s another reason why so many are hesitant to file for bankruptcy protection: Doing so severely damages consumers’ credit scores. And Chapter 7 bankruptcies stay on credit reports for 10 years. That’s a long time to be saddled with high-interest-rate loans and denials from lenders. Of course, the truth is that other ways of dealing with debt hurt consumer credit scores, too. Debt consolidation loans lower these three-digit scores. So does running up huge amounts of debt on credit cards. But even these financial decisions do not carry the same negative impact that filing for bankruptcy protection does.

The Debt Consolidation Alternative

Does the fact that only a small percentage of consumers who need bankruptcy protection file for it have an impact on debt consolidation companies? Probably. As painful as a debt consolidation loan can be, with its high interest rates and origination fees, it’s a far simpler process than filing for bankruptcy. You can bet that many consumers turn to it because the bankruptcy process is simply too overwhelming. This is unfortunate: Bankruptcy was designed to give consumers a fresh financial start. This can’t happen if they’re too overwhelmed or in debt to file for it.