If finances are a major problem for you right now, you are probably looking for an effective way to deal with your debt and all the stress that goes along with it. Two of the most popular alternatives for dealing with debt today are bankruptcy and debt consolidation loans. Each of these methods can be a very effective way to erase debt, but they couldn't be more different. With bankruptcy, the debts don't have to be paid at all. With debt consolidation loans, you still have to make payments. One quick question can help you figure out which is best for you.
How Much Can Your Budget Bear?
You should always be aware of exactly how much money is coming in each month, as well as how much is going out. Basically, be aware of what your budget can realistically bear.
Once you've added up all the regular monthly expenses like mortgage, utility bills, telephone bills, food, entertainment, and gas, note the amount that remains. Compare that number to the minimum monthly payments that are owed to your creditors. Can your budget bear paying the minimums every month?
When You Can't Pay The Minimums
If you can't pay the minimums every month, it may not be the right time to consider a debt consolidation loan because you'd still have to make payments on the loan. While the payments may well be less than what you're paying now, total relief from debt might be a better option if cash is super tight.
A bankruptcy might work well because you'll only have to pay bankruptcy attorney costs and filing fees. Even though these things might seem costly, they often amount to far less than the amount of debt that is owed. Ultimately, the argument for bankruptcy is a very strong one: After the bankruptcy is finalized, your debt will be gone. No more monthly minimum payment stress, and in fact no more monthly payment stress at all.
When You Can Pay the Minimums
If you can afford the minimum payments comfortably, it may be wise to consider a debt consolidation loan. By taking out one large loan to pay off all the smaller ones, you'll often be able to lower the total monthly amount due. Paying all the smaller debts off with a big loan allows you to eliminate the highest interest loans in many cases.
That minimum amount that you've been paying may not have helped you pay down debt very much before because it often went primarily to pay down interest. Usually, a debt consolidation loan has a lower interest rate than that of the current debts. Even if you just pay the minimum amount due each month on the debt consolidation loan, at least more of your money will go towards paying down the principal of the loan than it did with your previous debts due to the lower interest rate.
The argument for debt consolidation may not be as strong as the one for bankruptcy. You'll still owe money, while you would not with a bankruptcy. However, people who want to avoid bankruptcy might find debt consolidation to be a good alternative.
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