Deciding whether debt consolidation or bankruptcy is right for you
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Deciding whether debt consolidation or bankruptcy is right for you

| Jun 21, 2021 | Bankruptcy

Mounting debt can be an overwhelming experience. You may find yourself needing to choose between two less than attractive options — debt consolidation or filing bankruptcy.

The one you might want to choose varies based on your individual circumstances. There are pros and cons associated with each option.

What does debt consolidation entail?

Debt consolidation involves you consolidating your debts by taking on more debt, such as an unsecured personal loan, home equity loan or a balance transfer between credit cards. Many debtors pursue debt consolidation because it allows them to lock in a lower interest rate and to make just one payment every month compared to multiple ones.

How does bankruptcy work?

Consumers can generally choose between Chapter 7 or Chapter 13 bankruptcy. Chapter 7 may allow you to discharge most of your debts. Student loans are generally excluded unless you can show undue hardship. Chapter 13 gives you the ability to repay most of your debts with a new repayment plan.

Both options impact your credit score

Debt consolidation and bankruptcy both negatively impact your credit score for years. Your credit score will dip when you apply for debt consolidation. Although your credit may eventually recover, a bankruptcy can remain on your credit report for seven to 10 years.

Individuals wishing to pursue debt consolidation must have either a cosigner or good credit to lock in competitive interest rates and thus low monthly payments. You’ll also need the funds on hand to pay loan origination fees.

You may have to pay what you owe incrementally over several years as part of the debt consolidation process. There’s no discharge as part of it. Your creditors give you a payoff date instead.

You’ll have to demonstrate that your income is too low to cover your debt, which is part of passing the means test, to file for Chapter 7 bankruptcy. The trustee may convert your case to a Chapter 13 one if your income exceeds a certain amount. If they do that, then any nonexempt assets you have will go to paying off creditors.

Is filing bankruptcy right for you?

It may seem challenging to decide whether to choose bankruptcy or debt consolidation. Reading over information about the different bankruptcy options that exist may aid you in determining which option is right for you.