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debt consolidation vs bankruptcy - which is right for you

Debt Consolidation vs Bankruptcy



While looking for debt relief, the number of options at your disposal can be overwhelming. Debt consolidation and bankruptcy are two common strategies, but do you know the difference? These methods will have very different effects on your finances, so make sure you understand what makes each unique.

What is debt consolidation?

This method of debt relief is defined by the combination of all your debts into one monthly payment. This can happen in a few different ways:

  • Debt consolidation loan: Taking out a personal loan to pay off your debts in one lump sum payment.
  • Balance transfer: Combining all your credit card debt accounts onto one balance transfer card so interest rates stop applying for a promotional period.
  • Debt management program (DMP): Going through credit counseling to roll all your debts into one lower monthly payment.

Debt consolidation pros and cons

The debt consolidation process will be different depending on which method you use. However, all types of debt consolidation are usually better for your credit than other relief options as they don’t add a negative item to your credit report. This is especially true when you compare consolidation to bankruptcy. The biggest con of consolidating your debt is how long it takes. You save your credit score, but you will be making monthly payments for a few years.

What is bankruptcy?

Bankruptcy is a good option if you want to get out of debt quickly and you aren’t concerned about credit score damage. There are two main types of bankruptcy you could qualify for:

Chapter 7 bankruptcy

When you file a Chapter 7 bankruptcy, you get out of debt within 4-6 months by selling available assets that don’t qualify for an exemption for a lump sum payment to settle your debts. Ideally, this is usually the type of bankruptcy you want to file if you’re looking for the fastest exit from possible. However, you must pass a means test to qualify.

Learn more about how Chapter 7 bankruptcy works »

Chapter 13 bankruptcy

This takes longer than Chapter 7 and involves a repayment plan to pay back as much as you can of what you owe.  It could take up to 5 years to complete all the payments. If you’re comparing this to consolidation, this type of bankruptcy filing takes just as long to get through as many consolidation plans. So, you may not save time. However, the credit score damage sticks around for less time than Chapter 7 bankruptcy.

Read about the ins and outs of Chapter 13 bankruptcy »

Bankruptcy pros and cons

Unlike consolidation, bankruptcy will definitely have a negative impact on your credit report and score. In fact, Chapter 7 bankruptcy remains on your credit report for 10 years and Chapter 13 stays on your report for 7.

Weigh the pros and cons of filing for bankruptcy »

Debt consolidation vs bankruptcy: Final thoughts

These debt relief methods are very different and best for very different situations. If you are trying to decide between the two, you are likely going through something unique.

For some more insight, take a look at this question sent to our experts by a reader:

Question: I have $25,000 in credit card debt and only $2,000 a month in income. I’m 75 years old. Is bankruptcy a better choice than debt consolidation?

Bruce in California

Steve Rhode, the Get Out of Debt Guy, responds…

Just on face value, bankruptcy would certainly be at the top of my list to investigate further for you. You should meet with a local bankruptcy attorney who’s licensed in your state and discuss your particular situation.

If your assets are limited or not protected in bankruptcy, just given your age and income, it would make mathematical sense if you could eliminate your debt and live on your limited income. I’m less concerned about repaying your old debt – because I’m more concerned you’ll be able to afford to live and get by from this day forward.

Talk to a certified consumer credit counselor today for an expert opinion on your best option to get out of debt.

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Why consolidation may not work for you

If you’ve consolidated your past debt, you would be repaying it out of your limited income. Essentially, you would be trying to repair the past with future funds.

At 75, while I hope life treats you well, the odds are you are closer now to an unexpected medical or another expensive life issue that you’d have to deal with. By discharging the debt in bankruptcy and focusing on living within your income moving forward, just logically that seems like a more prudent approach.

If I were to engage in some pop psychology, I’d guess your reluctance to seriously consider bankruptcy has less to do with your financial numbers than your emotional reluctance.

Should you file for bankruptcy?

Bankruptcy has gotten a bad rap. It has an unearned reputation as the last refuge for deadbeats who cavalierly run up big bills on luxury items, then decide they just don’t want to pay for what they bought. So, they fill out a bankruptcy application, walk away without paying a dime, and then run up big bills again.

Of course, bankruptcy doesn’t work that way. Not even close. It’s a powerful tool for serious people, and it’s not at all easy to make happen. It’s also nothing to be embarrassed about.

Look at it this way: If you accidentally slip on a banana peel and fall on your rear end in public, that might be embarrassing. But if you seriously hurt yourself doing so, and if you need surgery to get back to full health – well, that’s not embarrassing.

Bankruptcy is financial surgery for those who have slipped and fallen, often through no fault of their own. They may have suffered a divorce, death in the family, serious illness, natural disaster, or been a victim of crime. Bankruptcy is a way to hit the reset button.

If you want to know more, and if you want a step-by-step guide, check out’s report, Should I File for Bankruptcy?

How Much Could You Save?

Just tell us how much you owe, in total, and we’ll estimate your new consolidated monthly payment.