Debt Consolidation Vs. Bankruptcy: Which Should You Choose?

TL;DR: Debt consolidation and bankruptcy are two options for debt relief available to you.

  • Bankruptcy involves discharging or restructuring all your debts—but it stays on your credit report for seven to ten years. It’s generally considered a last resort when no other debt relief options are available.
  • Debt consolidation means consolidating multiple older debts into a single new loan. You will still have debt, as you need to pay off that new loan now, but consolidation may help you minimize late payments and other fees incurred from multiple loans.

Which debt relief option is right for you depends on numerous factors, but we’ve gathered together the information you’ll need to help you make the best choice for you.

Still confused? Ask Tiff: What Are My Debt Consolidation Options?

What Is Bankruptcy?

Bankruptcy is a legal restructuring of your debts. When you file for bankruptcy, the court considers your debts and your income. Depending on the type of bankruptcy you file, you may need to submit a plan for paying back some of your debts. However, the end result of finalizing the bankruptcy process is that all the debts you entered with are considered discharged.

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    Whether you file Chapter 7, 13 or 11, if your bankruptcy is successful, you can start with a “clean slate” as far as what you owe. However, you don’t start with a clean slate with regard to your credit score. The late payments and issues leading up to the bankruptcy may still be reflected on your credit history. The bankruptcy itself will also stay on your credit report for a number of years.

    What Is Debt Consolidation?

    Debt consolidation involves paying off one or more debts with another type of debt. Like all other debt relief options, debt consolidation has pros and cons.

    In general, debt consolidation involves acquiring a debt consolidation loan or a balance transfer credit card. That means you need to be able to qualify for the credit, which can be difficult if you’ve been late or payments or have collection accounts on your credit report. It also means that you still owe the same amount.

    However, when you consolidate, the new debt is just that. It’s new. It’s not in collections and you’ve now paid off the old debt, so it can show up as paid in full on your credit report. If you continue to make payments as agreed upon on the new debt, you may see your credit score increase over time.

    Looking for other options? View our guide on how to choose a debt relief service.

    Curious how debt relief options affect your credit? Discover everything you need to know about debt relief and your credit score.

    Filing for Bankruptcy vs. Seeking Debt Consolidation

    Before you decide on bankruptcy, look at some options for debt consolidation. If you’re primarily dealing with high-interest credit card debt and you feel like you’ll never get ahead on it, you could consider a balance transfer card.

    Balance transfer cards typically come with low introductory APR offers. You can transfer existing balances to the new card and not pay interest on it for a certain amount of time—sometimes for a year or two. That lets you make payments on the balance and pay it off faster and cheaper. Balance transfer cards aren’t always the right choice, but if you find the right one for your needs, it can help you get a handle on debt without drastic financial choices.

    See our expert guide: Balance Transfer Credit Cards

    If you’re not dealing with credit card debt or don’t want to open another credit card account, then you might consider a debt consolidation loan. These loans let you convert your debt to a single loan, which makes managing your financial life that much easier.

    Whatever debt relief option you choose, has your back. Sign up for our Free Credit Report Card to keep track of your finances and additional tips and tricks for improving your financial health. receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.

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