Which Is Better – Bankruptcy or Debt Consolidation

When faced with debt problems, two of the most common get rid of your debtoptions people consider are bankruptcy or debt consolidation. Which of these two options are better? Experts may have their own opinions when it comes to making the right choice.

Some financial experts may say that bankruptcy is a better choice because it allows you to be completely free from debts. Others may disagree and suggest debt consolidation. In this article, we’ll discuss the basic points about these two options to help you decide which one is the better solution for you.

Bankruptcy Basics

In the past, anyone could declare bankruptcy and just walk away from debts. Although a record of bankruptcy is a very big derogatory mark and stays in your credit report for seven years, many people with large debts seek bankruptcy as an easy solution. However, since the bankruptcy law has been amended, the process of filing for bankruptcy has become more complicated than it was a few years back.

Today, you can only file for bankruptcy only after completing a credit counseling course from a government accredited counseling agency. The credit counseling agency itself would decide whether or not you need to file for bankruptcy. If you qualify, you need to submit your application and go through the Income Means Test to determine which Chapter of bankruptcy matches your financial situation.
If you’re eligible for a Chapter 7 bankruptcy, you can forget about all your debts to your creditors. However, if you’re only qualified for a Chapter 13 bankruptcy, you’ll be subjected to a mandatory repayment program. With this set-up, you would be required to submit a percentage of your salary each month until your debts are paid.

Debt Consolidation Basics

What about debt consolidation? Typically, debt consolidation is done by taking out a loan to pay off all your debts to different creditors. Afterwards, you would only have to make the one payment. With a debt consolidation loan, your goal is to lower your interest rates and if possible even negotiate down the amount of principal you owe.

Some people who apply for debt consolidation were able to complete their consolidation loan payments within 6 months. For others with bigger debts, it may take years before they are able to complete their repayment.

What is the advantage of a debt consolidation loan over bankruptcy? When done correctly, debt consolidation enables you to have lower monthly payments and deal with only one lender. Nevertheless, you must be diligent in making your payments on time. Because large debt consolidation loans often require collateral, there is also the risk of losing your property to foreclosure if you fail to keep up with your payments.

In order to work, the debt consolidation company must create an effective repayment plan or budget plan to make sure that you can make the payments. Also, before hiring a debt consolidation company you need to do your homework. You want one that is on your side. What I mean is that some debt consolidation companies are working hand in hand with some of the larger creditors. They don’t try to negotiate the best deal for you. They might tell you they negotiated 10% off your debt, but in reality, that is the amount they already negotiated with the creditors. On very old debt (for example, charge offs more than 4 years old) I’ve seen consumers negotiated 50-80% off on those debts! So make sure you are working with a company with your best interest at heart. And is aggressive in helping you gain some control over your debt.



  1. Debt Consolidation is my choice! its the way to live a debt free life

  2. Debt Consolidation newbie

    I learned from the article that yous post. It’s very helpful especially for those how don’t know what the difference between Bankruptcy and Debt Consolidation. Thanks for posting this one.

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