Debt Consolidation vs. Bankruptcy

Both debt consolidation and bankruptcy have their advantages and disadvantages. Before you decide to take action to get out of debt, you need to understand both options and determine which one suits your situation.

Of the various debt relief options available to consumers facing overwhelming debt, bankruptcy and debt consolidation are the two that most people consider. Loan consolidation may seem like the better option; however, both approaches present their own advantages and disadvantages. While bankruptcy may seem so drastic, and it often is, it doesn’t have to mean the end of the world for you. But you should expect to make major lifestyle changes, whichever way you decide to go.


Debt consolidation programs, also known as debt management programs, involve taking on a new credit line in order to pay for multiple credit card debts in one go. Consolidating credit card debt is a sensible choice for someone who has a large amount of unsecured debt and needs to reduce the amount required for monthly payments. However, if you are already considering bankruptcy, then chances are you may not qualify for a debt consolidation loan, or at least one with reasonable interest rates.

On the other hand, filing for bankruptcy is a completely legal process. During this time, you can block creditors from your assets and income while trying to restore your good financial standing. Filing for a Chapter 7 bankruptcy involves the liquidation of all but a few of your assets, such as your home and work-related assets. A Chapter 13 bankruptcy requires the reorganization of your assets and paying off of your debts within 3 to 5 years.


With loan consolidation, you will be given the chance to pay off debt at a reduced interest rate, since you will only have to deal with the single loan instead of several loans each month. A bankruptcy filing provides you with the benefit of a clean slate, which will allow you to begin working through debts, without being hounded by calls from previous creditors or their collection agencies. You will no longer have to worry about continuing to receive bills from them as well. In addition, bankruptcy is not limited to credit card debt.


The thing about debt consolidation loans is that they only work with unsecured loans, such as credit card debt. You will still need to make payments for certain secured loans, such as mortgage, home equity loan or car loan. On the other hand, bankruptcy has a stigma attached to it. Declaring bankruptcy is a matter of public record, and may appear on your credit report for 10 years after you filed for it. There are costs involved with both debt relief options. Bankruptcy filing, in particular, can be expensive as this involves administrative and court costs. If you need an attorney, which is likely to be the case, you will also need to pay legal fees.

Help from Experts

Make sure that you get the expert opinion of professional financial advisors and planners before you decide on any course of action. Many specialists warn that bankruptcy should be a last resort. If you are primarily dealing with credit card debt, then it makes sense to consider debt consolidation programs first. For those dealing with large debt problems such as foreclosure and repossession, bankruptcy may be a better option.