Debt Consolidation vs Bankruptcy: Which Is Right for You?

When debt becomes overwhelming, you have options. Two of the most common paths are debt consolidation and bankruptcy—but they have very different impacts on your finances and credit.

What Is Debt Consolidation?

Debt consolidation combines multiple debts into a single loan or payment plan. You still pay back what you owe, but typically at a lower interest rate and with simplified payments.

Types of debt consolidation:

• Personal loans
• Balance transfer credit cards
• Home equity loans
• Debt management programs

What Is Bankruptcy?

Bankruptcy is a legal process that can eliminate or restructure your debts. There are two main types for individuals:

• Chapter 7: Liquidates assets to pay creditors; remaining eligible debt is discharged
• Chapter 13: Creates a 3-5 year repayment plan based on your income

Key Differences

Factor	Debt Consolidation	Bankruptcy
Credit Impact	Minimal to moderate	Severe (7-10 years)
Debt Eliminated	No (paid in full)	Yes (partially or fully)
Timeline	2-5 years	3-6 months (Ch. 7) or 3-5 years (Ch. 13)
Cost	Interest payments	Attorney fees + court costs

When to Choose Consolidation

• You can afford monthly payments at a lower rate
• Your debt-to-income ratio is under 50%
• You want to protect your credit score
• You have good to fair credit

When to Consider Bankruptcy

• Your debt exceeds your annual income
• You're facing lawsuits or wage garnishment
• You can't afford minimum payments
• You've tried other options without success