Is Debt Consolidation as Damaging to Credit as Bankruptcy?

Bankruptcy attorneys in Sacramento, CA often get asked about the differences between debt consolidation and bankruptcy and which one causes more damage to your credit. A Chapter 7 bankruptcy will remain on your credit for 10 years, and so it does have the potential to affect your credit score significantly. Oppositely, debt consolidation may affect your credit for 3-5 years. Your credit score is quite resilient, however, and will heal over time after you have completed either form of debt relief.

Chapter 7 Bankruptcy in California

A Chapter 7 bankruptcy in California is a legal proceeding to eliminate certain forms of existing debts such as credit card balances, personal loans, and medical debt. Because Chapter 7 bankruptcy shows up on your credit report, it does affect your credit score, which has the potential to hurt your chances for future credit and potential rental property and even a job. The positive aspect of filing for Chapter 7 bankruptcy is how quickly the process typically takes. By utilizing chapter 7 bankruptcy, you could have a debt discharge in as few as 4-6 months, leaving you virtually debt free and ready to start rebuilding your credit.

Debt Consolidation in California

Debt consolidation is the process of consolidating all your payments into one and then paying this off over the course of 3-5 years. By utilizing credit counseling, as long as you don’t allow any of your individual loan balances to fall behind, you shouldn’t fall out of your consolidation plan, but it will show up on your credit report. Lenders will often not extend loans or lines of credit to individuals who are enrolled in a debt consolidation program, which could bar you from obtaining any new credit for a long time. Additionally, debt consolidation has a much lower success rate than that say of a Chapter 13 bankruptcy, which also lasts between three and five years.

Both Chapter 7 bankruptcy and debt consolidation have their pros and cons, and which one you decide on is a deeply personal decision based on your current debt, how much property you own, the type of debt you have, and how long you are willing to go without obtaining new credit. If you are debating which form of debt relief to pursue, contact your bankruptcy attorney in Sacramento, CA for advice on which is best for your financial situation.