Debt Consolidation vs Bankruptcy: Which is Better?

Know which action to take if your finances are in dire need of help

Updated May 13, 2024
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Fewer than 800,000 Americans filed for consumer bankruptcy in 2017, according to the Administrative Office of the U.S. Courts. While that number has steadily declined since the fallout of the 2008 financial crisis, it still represents a large group of people who felt like they had no other choice.

Filing for bankruptcy isn’t the only way to eliminate your debt, though, even if your situation is dire. Debt consolidation, either on your own with a loan or through a debt consolidation company or credit counseling agency, can be an appealing alternative.

Depending on your situation, it’s important to understand all of your options for how to pay off debt before you pick one. In this guide, we’ll cover the different types of bankruptcy and debt consolidation programs that can help you get the relief you need.

Main Differences Between Debt Consolidation and Bankruptcy

Before we get into detail about how debt consolidation and bankruptcy work, here’s a quick rundown of the primary differences between the two options.

Debt Consolidation

At its basic level, debt consolidation is the act of combining multiple loans into one. Note that consolidation does not include debt settlement, which involves negotiating with your creditors and paying less than what you owe. Here’s how it differs from bankruptcy:

  • It simplifies the debt repayment process
  • Your assets remain protected from your creditors
  • You could qualify for a lower interest rate with good credit or a co-signer
  • Paid debt consolidation programs can be costly but are typically cheaper than bankruptcy
  • Certain debt consolidation strategies can damage your credit


There are two types of consumer bankruptcy: Chapter 7 and Chapter 13. Depending on which option you choose, Here’s how it differs from debt consolidation:

  • Eliminates your debt with or without a payment plan
  • Costs as much as a few thousand dollars with attorney fees
  • May require you to liquidate your personal assets for repayment
  • You’re beholden to the court’s decision
  • Can damage your credit and remain on your credit report for up to 10 years

What to Know About Debt Consolidation

There are two types of debt consolidation that you can pursue. The first is through a debt consolidation loan and the second is through a paid debt management program with a credit counseling agency. If you’re considering using one of these options, understand both the benefits and drawbacks of doing so.


  • Doesn’t do as much damage to your credit as bankruptcy, if at all
  • You can qualify for a lower interest rate to save money
  • You can do it yourself or with the help of a co-signer or credit counselor


  • You may not qualify for a low enough interest rate on a consolidation loan
  • Consolidating with a debt management plan can hurt your credit and be costly over time
  • It may not be enough for extreme circumstances

Debt Consolidation Loans

Countless banks, credit unions, and other lenders offer personal loans that borrowers can use to consolidate other debts. Interest rates, fees, and other terms can vary by lender, but with so many options available, it’s easy to pick the one that’s best for you.

Taking on new debt to pay off old debt may sound counterintuitive. But doing so can help you combine multiple loans into one, simplifying your repayment plan. Also, some lenders may offer consolidation loans with lower interest rates than what you’re currently paying. So if you qualify, you could save money in the process.

Even if your credit history isn’t stellar, it’s still possible to get approved for a debt consolidation loan for bad credit. But while such a loan can help you consolidate several debts into one, your interest rate may be higher than what you’re already paying, which could exacerbate your problem.

Fortunately, some lenders allow you to apply with a co-signer, who can help you get approved for a better loan at a lower rate. Keep in mind, though, that not all lenders allow co-signers. Also, your co-signer will be equally responsible for paying the debt on the new loan. So if you default, it could damage both your and their credit.

Some debt relief companies offer debt consolidation loans, but those aren’t to be confused with their other programs, such as debt settlement.

Debt Management Programs

If your debt situation is a little more extreme, but you’re not to the point where you want to declare bankruptcy, a debt management program could be a good middle ground.

Credit counseling agencies offer debt management programs to help you consolidate unsecured debts into one monthly payment. Instead of offering a new loan, however, a credit counselor takes a single monthly payment from you and distributes it to your creditors.

A big upside of using a debt management program is that credit counseling agencies often have contracts with lenders that offer them lower rates than what you pay. Average rates range from 8% to 12%, which can be much lower than credit card APRs, for example.

There are, however, a couple of caveats to consider. First, you typically need to agree to stop using your credit accounts, specifically credit cards, during the repayment plan, which can take three to five years.

Also, your creditors can add a notation to your credit report that you’re no longer paying your debt as originally agreed. While that won’t hurt your credit score as much as a bankruptcy, it can still make it difficult to get approved for credit in the future.

Working with a credit counselor can save you money in interest, but expect to pay up to $75 up front and up to $55 per month for a debt management plan.

What to Know About Bankruptcy

Debt consolidation may be a better choice for most people. But it’s still worth considering bankruptcy if you feel overwhelmed. Your two options for bankruptcy are to file a Chapter 7 or Chapter 13. Depending on your situation and goals, one may be better than the other. Here are some bankruptcy benefits and drawbacks to know.


  • Can result in the discharge of some or all of your debts
  • Stops creditors from making collection attempts, including foreclosure and repossession
  • Some assets may be exempt from liquidation


  • A bankruptcy remains on your credit report for 7 to 10 years
  • Hiring an attorney to represent you can be prohibitively expensive
  • You may lose much of your property

Chapter 7 Bankruptcy

Also known as liquidation bankruptcy, a Chapter 7 bankruptcy eliminates most of your debts entirely.

There is a catch, however, says David Reischer, an attorney and CEO of “An individual who enters Chapter 7 Bankruptcy liquidates most of their assets with limited exceptions to pay off creditors,” he adds. Depending on the situation and your assets, they may cover part or all of what you owe.

Keep in mind, though, that certain debts, including student loans, alimony and child support, and back taxes are typically exempt from bankruptcy.

To qualify for Chapter 7 bankruptcy, you need to pass a means test to prove that your income and expenses make it impossible for you to repay what you owe. While a Chapter 7 bankruptcy can give you a fresh start, so to speak, it will remain on your credit report for up to 10 years.

The cost of filing is $335 for Chapter 7 bankruptcy, but if you hire an attorney to represent you, you’ll also be responsible for paying their fees, which can be in the thousands of dollars.

Chapter 13 Bankruptcy

Often referred to as reorganization bankruptcy, Chapter 13 bankruptcy assists you and your creditors in setting up a court-mandated payment plan to satisfy some or all of your debts. The plan typically takes three to five years, and your monthly payments are based on your ability to pay.

Chapter 13 bankruptcy is designed for people with regular income, says Reischer. “They get to keep most or all of their property so long as they pay off their debt obligations through a repayment plan.”

As such, a Chapter 13 bankruptcy is less likely to cause an upheaval of your entire life. That said, you typically can’t take on any new debt during the repayment process without approval from the court-appointed trustee, who’s responsible for distributing your payments to your creditors.

Also, once the payment plan is in place, you’re required to stick to it. If you don’t, the court may dismiss the case, putting you at the mercy of your creditors, or convert it to a Chapter 7 bankruptcy.

Once you file Chapter 13 bankruptcy, it will be added to your credit report and remain on there for seven years from the filing date. The cost of filing is $310 for Chapter 13 bankruptcy, but hiring an attorney can significantly increase the total cost.

Debt Consolidation vs. Bankruptcy: How to Choose

In general, debt consolidation provides relief on much softer terms than bankruptcy. But that doesn’t mean it’s the right answer in every case.

As a result, it’s critical that you understand all of your options thoroughly, as well as your financial situation. Here are some example situations and related thought process.

If Your Debts Are Manageable

If you’re tired of making monthly payments but are generally financially secure, a consolidation loan is likely your best bet. If you have great credit, you may even qualify to lower your interest rate, monthly payments, or both.

Take the time to compare personal loans and debt relief companies to make sure you get the right one for you.

If You’ve Missed a Payment or Two

If you feel like you’re starting to slip with your debt obligations, a debt consolidation loan could be an easy way to simplify your repayment plan. And if you have a good credit history or a co-signer with one, you may even save money while you’re at it.

If, however, you anticipate having trouble affording even a consolidation loan, it may be worth considering a chat with a credit counselor at the NFCC about a debt management plan.

If You’re Behind But Aren’t Yet in Collections

If you fall too far behind on payments, your creditors may sell your debts to collection agencies. Not only will that have a bigger negative impact on your credit score, but debt collectors are also typically more aggressive in trying to get you to pay.

If you’re not quite there yet, but your credit has already taken a hit from the delinquencies, a consolidation loan with a co-signer may still be an option. But if you can’t find one, a debt management plan may be your best bet to get out of debt without having to resort to bankruptcy.

If You Have Multiple Debts in Collections

If your debt situation is entirely unmanageable and you’re constantly trying to dodge collection calls, it may be too late to get a debt consolidation loan or get on a debt management plan. You could potentially try settling your debt, but it’s usually at this stage that many start considering bankruptcy.

Depending on your financial situation, Chapter 7 or Chapter 13 may be more appealing. Consider consulting with a bankruptcy attorney to get a better idea of which option is best for your situation.

“An experienced bankruptcy attorney will be better able to navigate the process,” says Reischer. “At the very least, they should be able to inform a client whether a debt consolidation loan is a better option than filing for bankruptcy.”

While hiring an attorney can be expensive, you can often get the initial consultation for free.

The Bottom Line

Dealing with debt is never a fun experience. But if you don’t address the problem now, it can get worse over time. If you’re looking for ways to get rid of your debt, debt consolidation and bankruptcy are both worthy options to consider.

The right option for you, however, depends on your financial situation and your goals. Take the time to consider each carefully. If you’re unsure or too stressed to take the next step, consider consulting with an attorney or credit counselor. They can help you understand each option and how they relate to your situation and help you choose the one that will provide you with the best path forward.

National Debt Relief Benefits

  • No upfront fees1
  • One-on-one evaluation with a debt counseling expert
  • For people with $30,000 in unsecured debts and up

Author Details

Ben Luthi

Ben is a personal finance and travel writer who loves helping people achieve their money goals. Along with FinanceBuzz, his writing has also been featured on U.S. News, NerdWallet, Experian, Credit Karma, and more.