Debt Consolidation vs. Bankruptcy: Which Is Right for You?

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

vintage balance on wood background
Logo

We’ve got your back! Student Loan Hero is a completely free website 100% focused on helping student loan borrowers get the answers they need. Read more

How do we make money? It’s actually pretty simple. If you choose to check out and become a customer of any of the loan providers featured on our site, we get compensated for sending you their way. This helps pay for our amazing staff of writers (many of which are paying back student loans of their own!).

Bottom line: We’re here for you. So please learn all you can, email us with any questions, and feel free to visit or not visit any of the loan providers on our site. Read less

Considering debt consolidation versus bankruptcy might feel like picking between a rotten apple and a spoiled banana. Either one is going to turn your stomach.

But making the right choice between these two options could set you on a path to feeling much better about your finances. Here’s what you need to know about the basics of debt consolidation and bankruptcy.

Debt consolidation vs. bankruptcy: The basics

Debt consolidation refers to taking on new debt to cover your old debt.

You could borrow an unsecured personal loan, for example, to pay off what you owe to creditors. A home equity line of credit or a balance transfer credit card are other strategies for the same end goal.

It might seem counterintuitive to take out different debt when you already feel like you’re drowning. But taking out the right personal loan could get you a lower interest rate and simplify your repayment.

Bankruptcy has its own set of rewards and consequences. You could discharge some or all of your debt via Chapter 7 bankruptcy, or repay some or all of your debt with a new repayment plan via Chapter 13 bankruptcy.

With either proceeding, however, you’ll harm your credit report for years to come.

Major pros and cons of debt consolidation

Debt relief companies or debt consolidation programs offer debt consolidation as a service, but for a price. You could consolidate your debt on your own, however, without opening your wallet.

Instead of paying for professional advice, rely on a certified credit counselor working for a nonprofit organization. You can find a list of legitimate credit counseling agencies via the Department of Justice.

Before you pursue debt consolidation, check out the following pros and cons.

Pro: Make one payment to one lender

If you’ve fallen behind with multiple creditors, you might love the idea of making one payment to one lender.

For example, you could borrow a personal loan, use the funds to pay off all your creditors, and then focus 100% of your energy on paying off the new loan.

Con: You need to have solid credit (or a solid cosigner)

The catch to debt consolidation is that you’ll need at least solid credit to qualify for a loan, and even better credit to snare the lowest possible interest rates.

The reality is that if your finances are a mess, your credit score might be too.

Still, there are ways to consolidate your debt with bad credit. You could find a cosigner and piggyback on their strong credit report, for example.

Pro: You could score a lower interest rate

Say you have credit card debt with an APR of 15.00%. With a personal loan, you could find an even lower rate if you qualify, or have a cosigner who does. These vetted personal loan lenders, for example, offer rates starting well below 10.00%.

That said, be on the lookout for origination fees from personal loan companies. When shopping around, compare APRs because they include both the interest rate and the origination fee, if there is one.

Con: You may continue a cycle of debt

Although an unsecured personal loan could wipe out some or all of your existing debt, you’ll still be responsible for paying off new debt.

To ensure you break the cycle of debt, it’s wise to stop borrowing money as soon as you’ve consolidated your debt. Start by cutting up your credit cards and re-evaluating your spending patterns.

Pro: You can set an end date for your debt

Credit card debt has no predetermined finish line. You can be making monthly payments to your card issuers and feel like your repayment is stretching on forever.

Through debt consolidation, you work with your lender to choose a fixed repayment term. Many of the best personal loan companies offer a range of repayment terms that are five years or less.

You could also find lenders offering longer repayment terms to lower your monthly payment amount. Be aware that the longer your term, the more interest you’ll pay over time.

Major pros and cons of filing for bankruptcy

You need to have a minimum amount of income to prove your inability to repay your debt when you file for Chapter 7 bankruptcy.

You surrender nonexempt assets to pay off secured debt. You might even have to yield other property to pay off unsecured debt.

You could assess your eligibility for both Chapter 7 and 13 bankruptcy proceedings by working with a credit counselor to review your options. Consider these pros and cons before you go that route.

Con: You could lose your property and assets

With a Chapter 7 bankruptcy, any asset that can be turned into cash will be used to pay off your debt. Only exempt assets, which are determined by your state’s laws, would be protected from sale.

If you prefer holding onto your assets, such as saving your home from foreclosure, you might elect for a Chapter 13 bankruptcy. But you’d want to consult a credit counselor or bankruptcy lawyer to review your options.

Pro: You can hit the reset button on your repayment

With a Chapter 7 bankruptcy, you could dispose of some or all of your debt.

With a Chapter 13 proceeding, you would establish a three- to five-year repayment plan for your remaining debt. That repayment plan might even give you the convenience of a single monthly payment if you’re working with a credit counselor on a debt management plan.

Con: You’ll need to prepare for lawyer and court fees

Even if you discharge some or all of your debt via bankruptcy, the proceeding itself can keep you in the hole.

Aside from footing the bill for a bankruptcy lawyer, there are a variety of court fees to handle. You could expect to shell out between $1,500 and $4,000 on average, according to Debt.org.

Pro: You can rebuild your credit (eventually)

Bankruptcy will harm your borrowing reputation in the short term, but you’ll be able to rebuild your credit in the long term.

With your bankruptcy behind you, you could start by monitoring your credit report and taking small steps such as becoming an authorized user on a significant other’s credit card.

Con: It might not be the fresh start you imagined

Whether you’re considering Chapter 7 or Chapter 13 bankruptcy, it won’t offer you the clean slate you might have been expecting.

For one, it’s unlikely you’ll discharge every cent of your debt. Student loans are difficult to discharge via bankruptcy, for example.

Even if you’re in the minority of consumers who could exit a proceeding debt-free, you’ll be left with little to no assets and a credit report in need of serious repair.

Debt consolidation vs. bankruptcy: How to choose

Debt consolidation is generally preferable to bankruptcy because it puts you in the driver’s seat. With a debt consolidation loan, for example, you simplify your repayment. You also begin working toward a date of being debt-free.

But debt consolidation isn’t for everyone.

“Taking a loan to consolidate debt can make sense when an individual is optimistic that their financial situation will be improving,” said debt relief lawyer Simon Goldenberg. “However, if [they’re] in serious financial turmoil, a consolidation loan is likely just a temporary patch, as the borrower may struggle to keep up with the payments.”

Ultimately, Goldenberg said, a borrower might just be “kicking the can down the road” with debt consolidation if they can’t come up with a long-term solution for handling debt repayment.

If your debt is beyond the point of being helped by consolidation, you might consider bankruptcy. It’s the closest thing to getting a redo in your financial life. The court case might even allow you to discharge a chunk or all of your debt.

Rebuilding your savings and credit will take time after filing for bankruptcy. But student loan lawyer Stanley Tate said some of his clients have added 100 points to their credit score within 18 months of bankruptcy.

“Whether to file bankruptcy is a pure math question,” Tate said. “If [the math makes sense], you can get rid of thousands of dollars in debt quicker and cheaper than you could if you consolidated.”

Seek professional advice from a credit counselor or bankruptcy lawyer to make the best decision for you. Don’t get talked into something that isn’t in your best interest.

If you’re still on the fence about debt consolidation versus bankruptcy, consider creating a debt management plan as an alternative strategy.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 6.58% APR to 14.87% APR (with AutoPay). Variable rates from 6.275% APR to 12.575% APR (with AutoPay). SoFi rate ranges are current as of July 16, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.275% APR assumes current 1-month LIBOR rate of 2.10% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.73% – 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
6.28% – 14.87%1$5,000 - $100,000
Check rate nowon SLH's secure site
6.87% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% – 29.99%$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%2$5,000 - $50,000Visit Citizens
15.49% – 34.49%$2,000 - $25,000Visit LendingPoint
5.99% – 35.89%$1,000 - $40,000Visit LendingClub
5.49% – 18.24%$5,000 - $75,000Visit Earnest
9.95% – 35.99%$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.