Being in debt can be daunting and debilitating.

It's like being trapped on a leaky boat in stormy seas. Your unpaid credit bills are holes letting water gush in and threatening to sink you.

Should you grab your repair kit and try to patch the holes? Or should you give in and send out an SOS alert?

In other words, do you opt for debt consolidation or bankruptcy to get out of debt?

Debt consolidation vs bankruptcy—get the definitions straight

Before we dive into the pros and cons of each strategy, let’s get our definitions straight.

Debt consolidation is a financial strategy that combines multiple debts, such as credit card balances, personal loans, and other outstanding debts, into a single loan or line of credit.

It’s the equivalent of identifying each leak in your boat and strategically sealing them one by one. Many find this option reduces financial stress and provides the focus needed to get to shore without sinking.

Bankruptcy is a financial status in which you declare your inability to pay your creditors, and that allows you to have your debts reorganized or forgiven.

There are two types of bankruptcy; Chapter 7 and Chapter 13.

The former allows individuals, couples, or businesses to pay off their debts by selling their assets. The latter enables individuals to pay off their debts over three to five years.

Declaring bankruptcy is like abandoning ship because the storm is too overwhelming, and your boat cannot be repaired in time to avoid sinking.

In this scenario, a rescue team pulls you out of your sinking vessel and takes you to shore, providing a fresh start.

But it’s not as easy or as simple as that sounds.

Here are the pros and cons of debt consolidation


  • Lower interest rates: By repackaging debt into a larger loan, your lender may provide a lower interest rate, making it possible to pay off debt faster.
  • Simplified payments: You only need to keep track of one payment each month.
  • Improved credit score: Making consistent, on-time payments builds a positive credit score over time.


  • Qualification requirements: Securing a consolidation loan with favorable terms is challenging if you have a low credit score or an unstable financial history.
  • Additional costs: Some debt consolidation options come with additional costs, such as application fees, origination fees, and prepayment penalties.
  • No debt relief: the consolidation loan involves refinancing or modifying the terms of an existing loan instead of giving you a fresh debt-free start

The pros and cons of bankruptcy


  • Automatic stay: Filing for bankruptcy immediately stops creditors from collection actions, such as lawsuits, deducting money from your salary, and making threatening phone calls.
  • Asset protection: In both Chapter 7 and Chapter 13 bankruptcy, depending on your state’s laws, you may be able to keep certain assets, such as a primary residence, a car, and essential personal belongings.
  • Fresh financial start: Bankruptcy allows you to rebuild your finances and credit score once the legal process is complete.


  • Credit consequences: Even though you have a fresh financial start, you’ve lost your boat (your credit score and financial reputation) and have to start building a new one from scratch. Bankruptcy also remains on your credit score for seven to ten years, making it challenging to qualify for future loans.
  • Public record: Potential employers, landlords, and others conducting background checks are privy to your financial status, which may affect job opportunities and housing applications.
  • Limited eligibility: Not everyone qualifies for bankruptcy. ​​Chapter 7 bankruptcy requires you to pass a means test to determine if your income is below the median income for your state or if you have sufficient disposable income to repay some of your debts in Chapter 13 instead.

To qualify for Chapter 13 Bankruptcy, you must have a steady source of income and have unsecured debts of less than $394,725 and secured debts of less than $1,184,200.

Additionally, you cannot have filed for bankruptcy in the past 180 days.

Is debt consolidation better than bankruptcy?

One isn't necessarily better than the other. Whether you choose bankruptcy or debt consolidation depends on the kind of leaks your boat has and how far from reaching shore you are.

When deciding between bankruptcy vs. debt consolidation, consider the following:

  • Asset protection: In some instances, Chapter 13 bankruptcy can protect assets, such as a house and car, through a repayment plan.
  • Amount of debt: If your debt is too high, it might be a better option to file for a Chapter 7 or Chapter 13 bankruptcy, which will either discharge or reduce the debt you owe.
  • Income predictability: Without steady income, there's no guarantee you can regularly pay back a consolidation loan, in which case filing for Chapter 7 bankruptcy is better.
  • Credit score: If you have a high credit score, you will benefit from competitive terms on a debt consolidation loan because your interest rates will be lower.

There are several options for consolidating your debt, such as taking out a personal loan, getting a balance transfer credit card, or applying for a home equity loan.

On the other hand, if you choose to file for bankruptcy, you will inevitably have to hire a lawyer to get through the legal process and will be at the court's mercy when deciding upon a repayment plan and other bankruptcy terms.

A major decision

Deciding how to handle debt is indeed a major, life-impacting decision.

In essence, debt consolidation requires effort and discipline but keeps you afloat without severe consequences.

Bankruptcy offers a fresh start but damages your credit score and financial situation, affecting your ability to borrow in the future.

If you feel like you're sinking under financial obligations you cannot meet, contact a credit counselor, a bankruptcy attorney, or a financial advisor.

The National Foundation for Credit Counseling (NFCC) can also provide guidance and help you create a plan to get out of debt.