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Residents in Washington, D.C. struggle with debt

Household debt in collections in Washington, D.C., was more than 40 percent as of June 2014, which is one of the highest rates in the nation, according to the Urban Institute. This debt, mostly from mortgages, credit cards, car and student loans, coupled with one of the highest unemployment rates in the country, has residents in the capital struggling to decide whether to consolidate debt or file for bankruptcy. Deciding the best option for debt recovery requires that individuals calculate the benefits versus the cost of both choices.

Consolidation companies have rapidly grown in recent years. These firms call creditors on behalf of their clients and organize a payment arrangement. Consumers then pay a monthly installment for several years. Sometimes, consolidation firms offer their clients loans and often use a consumer's property as collateral if the person defaults on this loan. Typically, only open accounts that are mildly late may be consolidated. Consolidation can be a good option for those who can afford monthly payments and for those who do not want the bankruptcy label on their credit report.

Bankruptcy is usually the quickest solution for consumers overwhelmed with debt. Filing for bankruptcy requires hiring an attorney who acts on behalf of their client during meetings with creditors in many cases. Moreover, legal counsel can help consumers decide whether they want to file under Chapter 7 or Chapter 13 bankruptcy laws. Bankruptcy marks a person's credit report for seven years; however, financing companies will immediately send those who file pre-approved credit offers because bankruptcy can only be filed once in a person's lifetime.

When choosing between consolidating debt or filing for bankruptcy, consumers must ask themselves whether they prefer monthly payments or one larger payment and a bankruptcy label for seven years. Additionally, they must decide if they prefer a debt company or an attorney acting on their behalf. If a person cannot afford monthly payments or debt has already been sent to heavy collection, bankruptcy is likely the best long-term solution for rebuilding credit.

Source: Urban Institute, "1 in 3 Americans with a Credit File Has Debt Reported in Collections," Stu Kantor, July 29, 2014

Source: The Huffington Post, "Debt Consolidation or Bankruptcy? Choose Wisely the First Time", David Goehst , September 26, 2014

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