Is Debt Consolidation Better Than Bankruptcy?


When you are faced with a bunch of debt that you have no idea how to tackle, you have several options in front of you. Besides crawling in a hole and hiding from your creditors, you have a few legitimate options to handle the debt as well. Two options that many people in this situation consider are debt consolidation and bankruptcy. Both of these options have some merit, depending on your situation.

Debt Consolidation vs. Bankruptcy

In order to decide which option is best for you, you need to make sure that you fully understand how each of them work. With debt consolidation, you are a money from a new source like a personal loan or a home-equity loan and use that cash to pay off your other accounts. You’re left with just the one account that has all of your debt bundled in it.

With bankruptcy, you have two different options to consider. You could file for Chapter 7 or Chapter 13 bankruptcy. With Chapter 13 bankruptcy, you get involved with a repayment plan that is administered through the court. You make a monthly payment to your bankruptcy trustee and then he pays your creditors for you. With Chapter 7 bankruptcy, you get most of your debt discharged with the help of the court. At that point, you don’t have to worry about paying back the debt and you basically get a clean slate to work with.


When trying to decide between debt consolidation and bankruptcy, you have to think about the speed at which you will complete the process. One of the drawbacks of using debt consolidation is that it can take quite a bit of time to pay off your debt. Depending on the size of the debt, it could take you many years to pay it off. This is also the case when you pursue a Chapter 13 bankruptcy. With this type of bankruptcy, it typically takes somewhere between three and five years to pay off your debt.

By comparison, with a Chapter 7 bankruptcy, you can essentially get rid of all of your debt right away. The process of going through the Chapter 7 bankruptcy can take several months, but when it is complete you don’t have to worry about your debt anymore. This means that if you are interested in getting out of debt quickly, Chapter 7 bankruptcy is the best option to consider.

Credit Damage

While it can be quicker to get out of debt when using a Chapter 7 bankruptcy, you’re not going to be doing your credit any favors by using it. If you use a Chapter 7 or Chapter 13 bankruptcy, you will essentially destroy your credit score. Your credit score will fall by hundreds of points right away and it will take several years to get yourself back out of the hole that you created. A bankruptcy is going to stay on your credit report for 10 years. During that time, every time you apply for a loan or some kind of financing, the creditor is going to see the bankruptcy judgment on your record. This will make it very difficult to get approved for any kind of financing during that span.

When you use debt consolidation, you will have to worry about doing as much damage to your credit score. There is nothing inherently wrong with doing a debt consolidation in the eyes of your creditors. You are still paying off all of the debt that you owe. You are simply repackaging some of it. When making your decision, you have to determine whether you value speed or your credit score more.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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