Debt Consolidation v Bankruptcy – Which is Better?

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In a Nutshell

Almost anyone who is experiencing difficulty paying their bills and considering filing for bankruptcy will come across advertisements or solicitations for something known as “debt consolidation.” This article will discuss the difference between debt consolidation and bankruptcy and give you some help in deciding which is better for you.

Written by the Upsolve Team.  Reviewed by Attorney Andrea Wimmer
Updated July 22, 2020


Almost anyone who is experiencing difficulty paying their bills and considering filing for bankruptcy will come across advertisements or solicitations for something known as “debt consolidation.” This article will discuss the difference between debt consolidation and bankruptcy and give you some help in deciding which is better for you.

Understanding Debt Consolidation

The term debt consolidation or “debt management” refers to the process of taking all of your individual debts and consolidating them into one large debt. There are many forms of debt consolidation and some are far more beneficial than others. For example, some forms of debt consolidation simply combine your credit card debts and the payments on those credit cards into one single monthly payment. So, for example, if you owe $2,000, $3,000 and $1,000 on three separate credit cards and paid $50 on each, simple debt consolidation would combine these three credit card debts into one $6,000. So, the dollar amount of your debt doesn’t change, but your minimum payments should be a lower amount each month. The benefit of this type of debt consolidation is that instead of trying to make three different payments on three different dates every month you would get the convenience of making one payment at the same time every month. This type of debt consolidation is usually accomplished by one or more credit card “balance transfers” or a personal loan.  Balance transfers usually have fees associated with them and advertise promotional interest rates that usually increase significantly if the balance is not paid off by the end of the promotional period. As a result this type of debt consolidation only makes sense if there is a lower interest rate charged on the balance throughout the entire repayment period.

Debt Consolidation Loans

Unlike credit card balance transfers, debt consolidation loans are loans specifically designed to consolidate a person’s debt. Most companies that offer debt consolidation loans do so with the requirement that the loan is secured by your home or another valuable asset. Some lenders require you to you agree to pay a significantly higher interest rate on the debt consolidation loan than you were paying on your credit cards. In fact, some companies soliciting debt consolidation loans advertise rates as high as 400% on the consolidated loan. Consolidating your debts with a debt consolidation loan can be a great way to get out of debt, but only if you’re sure the payment on the new loan makes sense and fits into your budget. 

The Impact on Your Credit Report

One of the first considerations most consumers make when deciding whether to take advantage of a debt consolidation program or file bankruptcy is the impact on their credit report. As discussed earlier in this article, there are some forms of debt consolidation that will not adversely affect your credit report and may in fact slightly increase your credit score by reducing the number of “open accounts” you have. However, most individuals in need of debt consolidation will usually not get enough relief by simply “combining” their debt. As a result, if they are seeking debt consolidation they need a form of debt consolidation that also reduces the interest paid on the debt and the amount of debt. This type of debt consolidation, often accomplished through a debt management plan, will adversely affect your credit score at the beginning as your accounts will be closed as part of the plan. Still filing bankruptcy is a serious decision and should only be taken advantage of by those individuals who simply can no longer afford to pay their bills. While the fact that you filed bankruptcy will be reported on your credit report for up to ten years, most consumers are able to re-establish their credit and even qualify for a new car loan or mortgage within a few years after their bankruptcy is discharged.

The Negative Aspects of Debt Consolidation

Since consolidation via balance transfer or consolidation loan pays off all existing creditors immediately, negatives are typically linked to debt management plans. First, almost all debt consolidation companies will charge a fee for their services which must be paid along with your consolidated payment. Second, none of your creditors are required to agree to take part in a debt consolidation program. As a result, you can go several months without making payments to your creditors only to be told that one or more did not agree to take part in your debt consolidation. Finally, even if all your creditors agree to have their debts included in your debt consolidation, doing so does not prevent any of them from suing you in court or garnishing your wages if they have already sued you, while you are in the debt consolidation program. 

Chapter 7 Bankruptcy

Most individuals considering filing any type of bankruptcy instead of seeking debt consolidation are usually weighing it against a Chapter 7 and Chapter 13 bankruptcy. Chapter 7 bankruptcy is a form of consumer relief available by law to individuals who can no longer afford to pay their bills. A Chapter 7 bankruptcy eliminates your debt without you having to repay any of it in exchange for you surrendering any of your non-exempt property. However because of the generous exemptions provided to most consumers in a Chapter 7 bankruptcy, most individuals are not required to surrender any of their property. A Chapter 7 bankruptcy is not only superior to debt consolidation by eliminating your debts without repayment, but it is also the least expensive type of bankruptcy you can file. In fact, most individuals who have less than $10,000 in assets, do not own their home and earn less than $50,000 can file their own Chapter 7 bankruptcy. Something that Upsolve can help you do today if you qualify. Another advantage of filing Chapter 7 bankruptcy over debt consolidation is the “automatic stay” that protects you once your bankruptcy is filed.  The automatic stay automatically takes effect when you file bankruptcy and prevents any of your creditors from harassing or suing you to collect any of the debt you owe to them. The disadvantage of a Chapter 7 bankruptcy, as with some other forms of debt consolidation is that it will negatively affect your credit score at first, though rebuilding your credit after bankruptcy can be accomplished in a couple of years.  

Chapter 13 Bankruptcy   

Chapter 13 bankruptcy is another form of legal debt relief available to individuals who can no longer afford to pay their bills. A Chapter 13 bankruptcy reorganizes your debt into one lower monthly payment similar to a debt consolidation program so you only pay as much as you can afford for 5 years. It’s essentially a debt consolidation, but without the requirement to pay off all of your debts. In addition, just like Chapter 7, filing a Chapter 13 bankruptcy entitles you to an automatic stay and results in the entry of a discharge order. The advantage of a Chapter 13 bankruptcy over a Chapter 7 is that you are not required to surrender any of your property and it is available to all consumers regardless of how much property they own or how much income they earn. The disadvantage of a Chapter 13 bankruptcy is that it is often much more expensive and much more complicated than a Chapter 7. In fact, most individuals filing a Chapter 13 bankruptcy are best served by seeking the help of an experienced bankruptcy attorney before doing so. In addition, the time it will take to repay your debts in a Chapter 13 bankruptcy can be as long as three to five years. During this time you will usually not be able to obtain new credit without prior approval from the Bankruptcy Court.

Getting Out of Debt

Whether an individual is considering debt consolidation or bankruptcy, the ultimate desire of everyone seeking debt relief is to get out of debt. Both debt consolidation and bankruptcy offer a path to doing that but only bankruptcy comes with a guarantee that if you complete the process you will be (mostly) debt-free. Debt consolidation on the other hand, if tailored to your specific situation, can be less binding than filing for bankruptcy, and provide you with enough relief to get through a temporary or short term financial setback. In the end, deciding which is best for you depends on your current situation and your ability to pay your bills now and in the future. The less likely it is that things will get better for you in the near future, the more likely it is that bankruptcy is the only true “debt relief” available to you.

Credit Counseling

If you are considering filing for bankruptcy or entering into a debt consolidation program you may be entitled to free or low-cost credit counseling through one or more of your local non-profit credit counseling agencies. In larger cities, many free legal aid centers also provide access to free credit counseling for low-income families and the elderly.

File Bankruptcy for Free

If you need help locating free or low-cost credit counseling in your area or are interested in filing your own bankruptcy for free, Upsolve may be able to help. Upsolve is an award-winning nonprofit that's funded by the U.S. government, former Google CEO Eric Schmidt, and other private charities. We have helped our users eliminate more than $100,000,000 of debt and are well on our way to 150,000,000. Founded in 2016, in just three short years, Upsolve has become the largest provider of bankruptcy services in the United States.  



Written By:

The Upsolve Team

Upsolve is fortunate to have a remarkable team of bankruptcy attorneys, as well as finance and consumer rights professionals, as contributing writers to help us keep our content up to date, informative, and helpful to everyone.

Attorney Andrea Wimmer

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Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

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