Debt Consolidation vs Bankruptcy

Debt Consolidation vs Bankruptcy

Whether you are struggling to pay the high minimum payments on your credit cards or worrying about how to pay thousands of dollars in unanticipated medical bills, too much debt can wreak havoc on your financial situation and make life more stressful. It is important to remember that there are several options for people drowning in debt. The option that is best for you will depend on the total amount of debt you have, the type of debt you have, and how much money you have available to apply to your balances. Debt consolidation and bankruptcy are two of the options that can help you get back on track.

Debt Consolidation

Debt consolidation refers to taking out a loan to pay off all of your debts. If you owe a total of $10,000 on three different credit cards, you are likely paying three different interest rates. You also have three separate payments to make each month, making it more difficult to manage your finances. If you want to consolidate your debts, you would take out a $10,000 loan and use it to pay off those three credit cards. Then you would make one monthly loan payment instead of three credit card payments. Debt consolidation might help you lock in a lower interest rate or lower your total monthly payment, making it a good option for some borrowers. How debt consolidation affects your credit score will depend on how you handle your accounts after taking out the debt consolidation loan. If you close all of the accounts to eliminate the temptation of using them to accumulate more debt, your score will decrease. This is because the credit scoring agencies consider the age of your accounts when calculating your credit score. If you leave the accounts open, however, you run the risk of using them to increase the amount of debt you have. Because debt consolidation loans typically have longer repayment periods than other types of debt, it may take you longer to recover from debt consolidation than it would to recover from other debt repayment options.


Consumer bankruptcy is a legal process that makes it possible to eliminate some of your debts or negotiate payment plans with your creditors. Chapter 7 bankruptcy allows you to keep some of your personal property, but the bankruptcy trustee may sell off other property and use the proceeds to pay some of your debts. This is why Chapter 7 bankruptcy is also known as liquidation bankruptcy. Chapter 13 bankruptcy is an option for those who earn enough income to repay their debts. When filing for this type of bankruptcy, the consumer proposes a debt repayment plan that must be approved by the bankruptcy trustee. Chapter 13 bankruptcy makes it possible to make payments on debts secured by real or personal property, so you may be able to avoid foreclosure or repossession if you decide to file. Bankruptcy is considered a negative credit event, but the impact on your credit score will depend on your past financial situation. If you had a very high credit score, filing bankruptcy will most likely result in a significant drop. Consumers who already had low credit scores due to late payments and missed payments may not see much of a drop in their scores. Financial institutions typically say that it takes seven to 10 years to recover from filing bankruptcy, but the recovery period depends on your financial history and how well you manage any new debts after your old debts are discharged.

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