Debt Consolidation Vs. Bankruptcy: Which Is Right For You?

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Millions of Americans have some kind of debt in personal loans, student loans or credit cards. The average individual credit card debt alone is around $6,140, according to a recent Bankrate study on the U.S. debt burden by state.

If you’re struggling to pay off large amounts of debt, debt consolidation or bankruptcy may be options to consider. But first, understanding how they differ will help you identify the right solution for you.

Debt consolidation vs. bankruptcy

Bankruptcy and debt consolidation are both intended to relieve debt, but knowing how they contrast will help you make the decision that’s right for your finances.

When to consider debt consolidation

Debt consolidation could be a good option if you:

• You want to simplify multiple payments into one.
• You have good credit and qualify for a lower overall interest rate.
• You have a reliable income and can reasonably make your new payments.
• You qualify for a balance transfer card or loan with a reasonable interest rate and repayment term.

“Debt consolidation offers some huge benefits,” says Joseph Camberato, CEO at National Business Capital. “It lets you reorganize and clean up your debt without going through the bankruptcy process. Even if your credit has taken a hit because of high debt or late payments, consolidating is still better than bankruptcy.”

What type of debt consolidation is right for you?

There are many types of debt consolidation available. Depending on what you can qualify for, how much you can put toward payments and overall goals, some options may work better for your financial situation than others.

If you have stellar credit, a low-interest debt consolidation loan may be a good option. If you’re able to pay off your balance in 12 to 18 months, a balance transfer credit card might be better.

Loan calculator

Run some numbers and decide whether debt consolidation makes sense for you — and how much money you could potentially save by going this route.

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When to consider bankruptcy

Between debt consolidation and bankruptcy, debt consolidation is almost always the better option. Generally speaking, you should only consider bankruptcy if:

• You have a debilitating amount of debt and have exhausted all other debt relief options — including loan modification, debt consolidation, debt settlement and forbearance.
• You have a lawyer who can guide you through the process.
• Your credit score has already taken a serious hit due to your inability to pay your debts.
• You qualify for a means test (Chapter 7) and get most of your debts discharged.
• You’ve weighed the risks and benefits, and it’s your best option.

“You should only consider bankruptcy if your debt is so overwhelming that you can’t realistically pay it off in the next 2 to 5 years,” Camberato says. “Life happens — medical bills, unexpected expenses, and sometimes you end up in extreme debt. If you’re in that situation, bankruptcy might be your best option.

“But if you can manage to consolidate and pay off your debts within a few years with some effort, I would definitely suggest that route,” Camberato adds. “Bankruptcy can severely damage your credit for a long time, making it tough to rebuild.”

Bottom line

If you’re struggling to pay back multiple creditors, you could use a loan or a credit card to consolidate your debts. This can make it easier to pay off your debts and reduce the stress of juggling multiple payment due dates. It might even cut down on your total interest charges over time.

If you can’t get a handle on your debts and your credit score has already taken a serious hit, bankruptcy may be worth considering. Just remember, bankruptcy has a long-term effect on your credit — and assets — and can take years to recover from. Weigh your options carefully and, when in doubt, consult a bankruptcy attorney for advice.