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Is A Debt Consolidation Loan Like Bankruptcy? The Differences Explained

There are a great number of people who are confused about the differences between debt consolidation loan services and bankruptcy. Both of these are options designed to help people manage their debt without greatly affecting their quality of life in the process.

The major difference between a debt consolidation loan and bankruptcy is that you, as a debtor, are still paying 100% of your debt obligations through the consolidation loan. There are no negotiations towards reducing your debt or discharging it through a bankruptcy filing. You can read more here - http://www.toptenreviews.com/money/debt/best-debt-consolidation-companies/.

This important distinction is what sets these two debt management practices apart, and what can make debt consolidation loan services much more attractive than bankruptcy or debt settlement. There are more differences between these two that, once explained, can help you decide which is the option for you.

Your Credit Score Will Not Take a Plunge

While debt consolidation can affect your credit score, especially if the loan agreement specifies that you must close your existing credit accounts, this is not nearly as dramatic a change as the effect that a bankruptcy filing would have. A consolidation loan will leave you with a good enough credit score to take care of most future needs.

In fact, if you have already stumbled as a result of your debt and missed payments, then your debt consolidation loan may end up helping you improve your credit score by allowing you to make timely and consistent payments until you are effectively debt-free.

Your Debts Remain Valid, Although Restructured

Many people seek debt consolidation loan services under the misguided idea that the third party agency involved can make their existing debts go away by assuming the debts themselves. Although you will no longer be harassed by your current creditors for payments, you are still obligated to pay your debts back just as you would be otherwise.

The fact that a debt consolidation service may be able to negotiate a better interest rate is something that can help you enjoy more manageable finances throughout this period. Lower monthly payments over a longer period of time with a lower interest rate can help you manage your existing debts while still giving you the ability to pay them back in full over time.

For this reason, consolidation loan services are generally vastly preferred over bankruptcy filing, which may discharge you from your debt obligations, but will also gravely affect your future credit worthiness.