Debt Consolidation vs Bankruptcy

Which solution would be better for your debts?

Debt consolidation and bankruptcy are ways of managing your debt which are used very often nowadays. And to bring the topic closer, we analyze both ways and find the advantages and disadvantages of them.

Debt consolidation

This strategy will be offered to you as a good way to save money and avoid credit rating damage. In short, debt consolidation means consolidating a few debt payments into one. You can do it by taking either a secured or an unsecured loan.

What is good about it?

  • Unlike bankruptcy, debt consolidation does not affect your credit score so severely and thus, you protect your financial reputation. It will appear on your credit report, but it does not automatically create a negative tone. It can be even seen as a positive item.
  • You will not lose access to credit. Of course, it all depends on a certain agreement you make while taking a consolidation loan, but still there is a chance that you get the access. But being in default or owing a big sum can disqualify you from taking more credit.
  • It is more convenient. One payment in one bank – it is much less complicated.
  • You may receive a lower interest rate on your monthly payments.

What is bad about it?

  • There is a possibility that you lose a lot. If you fail to pay everything right and on time and you have used your property as collateral for the loan, you may lose it.
  • You may pay more. It is more convenient, you may receive lower monthly payments, but … it usually works in this way: the longer you pay something off, the more you pay for it in the final result.
  • You may have to pay tax. There is a possibility (depending on your current financial wellbeing) that IRS considers the money you save by the use of debt relief services your… income.


This strategy will help you eliminate or restructure your debt whereas being under the protection of the federal bankruptcy court. Chapter 7 and 13 are the most popular bankruptcy cases among individuals and small businesses. The former may eliminate many types of debt, and the latter may restructure your debts by the means of a supervised repayment plan.

What is good about it?

  • You get protection from creditors. The protection of the automatic stay will help you avoid lawsuits, garnishments, harassing phone calls, repossessions or foreclosures.
  • You receive a chance to start once again. Using a Chapter 7 bankruptcy case you can get rid of your unsecured debt or surrender property that you have financed, but you would like to eliminate those debts. A Chapter 13 case may help you pay off your unsecured debts at a reduced rate and avoid foreclosures or repossessions.

What is bad about it?

  • Negative impact on your credit score. This item may stay with you for even 10 years.
  • It demands sacrifices. It mostly means losing luxurious and nonessential possessions and in the case of Chapter 7 you will not have access to credit (unless the court gives a permission) and you will have to live on a strict budget for a few years.

Negative impact on your reputation. Privately, nobody must know about your bankruptcy, but formally, this is a public record and, for example, your employer may learn about it from your credit report.