Debt Consolidation vs. Bankruptcy

Some people compare debt consolidation to bankruptcy, but the truth is, the two could not be more different. Here’s a look at some of the major differences between bankruptcy and debt consolidation:

Credit

By declaring bankruptcy, you all but give up the privilege of having a credit card or taking out a loan. Bankruptcy absolutely ruins your credit score, which is the deciding factor in almost every credit card or loan application. Even if you do manage to get approved for a new line of credit, it will almost certainly be at a ridiculously high interest rate. A bankruptcy mark stays on your credit for years to come and some creditors will not even consider applications from consumers that have ever declared bankruptcy, no matter how long ago it was.
Debt consolidation’s effect on your credit score is just the opposite of declaring bankruptcy. Not only will your score not suffer, it should actually improve over time. As you eventually begin paying off your debt, your overall debt to remaining credit ratio will increase. This plays a major role in determining your credit score and you will begin to see improvement in no time.

The main thing you want to do, and get help with, is manage your debt! Find more information about managing your debt on other pages of our site.

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Financial Obligations

Believe it or not, declaring bankruptcy does not mean you are free of all of your financial obligations. While you may be able to get out of certain debts, others such as taxes, student loans, payday loans, or child support cannot be discharged. You will still be required to pay these debts, along with a few others.
While you will still be responsible for most of your financial obligations with debt consolidation, you may be able to at least get them reduced or any interest rates lowered. Many people are able to get much lower interest rates on their credit card debt, which can save hundreds of dollars over the course of a couple years.

Possessions/Investments

In order to pay off part of your debt, you will likely lose some of your valuable possessions when declaring bankruptcy. That could mean your vehicle, family heirlooms, and even stocks or other investments.
Since you are actually paying off all of your debt, there’s no risk that you will lose any of your possessions by applying for debt consolidation. You can even a keep some of your credit cards once you have paid their balances down.