Debt consolidation vs. bankruptcy

By Rebecca Lake

Reviewed by Kimberly Rotter

Aug 22, 2023

Read time: 5 min

Three generation male family walking together on grassy field

Key takeaways:

  • Debt consolidation could help you streamline debt payments and‌ get a lower interest rate.

  • Bankruptcy could allow you to restructure your debts or erase them. 

  • When neither option is the best choice, you could consider debt resolution (negotiating with your creditors to accept less than the full amount you owe).

Carrying a heavy debt load is exhausting. But the options for releasing it can be confusing.

Consolidating debts and filing for bankruptcy are two very different approaches, and they both have a right time and place.

Debt consolidation offers a promising opportunity to simplify your finances by combining your debts on agreeable terms. (Agreeable terms aren't a guarantee, but you shouldn't consider a debt consolidation loan that doesn't improve your financial situation in some way.)

Bankruptcy can provide a fresh start by discharging (forgiving) certain debts and giving you a chance to rebuild your financial life from scratch, free from the shackles of heavy debt.

Here's how these options work.

Understanding debt consolidation

Debt consolidation is using a new loan to pay off multiple smaller debts. You might combine full or partial balances of existing debts using this strategy. Doing so could help you accomplish any of these goals:

  • Reduce the interest rate on your debt

  • Reduce the number of monthly payments you make

  • Get a more manageable monthly payment

  • Lower your credit utilization ratio (your credit card balances compared to your credit limits)

  • Bring past-due accounts current

You can use a personal loan to consolidate credit card balances, medical bills, or other debts. 

Home equity loans are another option for debt consolidation. Equity is the difference between your home's value and what you owe on your mortgage. If you own a home and you have enough equity, you could borrow against your equity to pay off other debts. 

Key concepts to know about personal and home equity loans for debt consolidation


Collateral is something valuable that you pledge to the lender as a guarantee that you'll repay the loan. Personal loans can be secured or unsecured. Secured loans require collateral. Unsecured means you qualify based on your creditworthiness and your income. Most personal loans are unsecured.

All home equity loans are secured. A home equity loan is a second mortgage, and the home is the collateral. Just like with a primary mortgage, if you don't repay the loan, you could lose your home.

Loan amounts

Personal loans typically range from $5,000 to $50,000 but can be higher or lower. 

Home equity loans can be larger if you have enough equity to borrow against. 

Repayment terms

Personal loans are typically repaid within two to five years. Home equity loan repayment terms usually range from 10 to 30 years. 

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Understanding bankruptcy

Chapter 7 bankruptcy can allow you to get rid of debt without paying. But you may need to give up some or all of the things you own (your assets) to do that. The bankruptcy court can take those assets and use them to pay your creditors. 

Chapter 7 typically takes less than six months.

In Chapter 13, you don't give up any assets, but you have to repay your debts using all of your disposable income over three or five years. The court decides the amount of your monthly payment. You can use Chapter 13 to get back on track with mortgage payments or auto loan payments if you're near foreclosure or repossession. 

In Chapter 13, low-income filers pay for three years, and people who earn more pay for five years.

You might not get to choose which kind of bankruptcy you file. Your income and the value of the things you own determine which kind is the best (or only) option for you.

Comparing debt consolidation vs. bankruptcy

Is debt consolidation or bankruptcy the best way to deal with debt? It depends on your financial situation, how much you owe, and how much you can afford to pay. 

How are they similar? 

  • Debt consolidation and bankruptcy can both help you get rid of debt. They both have the potential to save you money (if you get a lower interest rate on a debt consolidation loan, or if you get debt forgiveness through bankruptcy). 

  • Not everyone qualifies for a debt consolidation loan. Likewise, not everyone qualifies for Chapter 7, the "clean slate" bankruptcy. 

  • Chapter 13 bankruptcy is similar to debt consolidation in that you will make a single monthly debt payment for several years. 

Here are a few differences between debt consolidation and bankruptcy:

  • Your credit score and income determine whether you can get a debt consolidation loan and the terms of the loan. Bankruptcy has no credit score requirement. 

  • Bankruptcy can stop collection efforts and foreclosure. A loan cannot.

  • Bankruptcy has a lasting negative impact on your credit. Debt consolidation loans can have a small, temporary negative effect on your credit. If you make your payments on time, a loan can have a positive effect on your credit profile over time.

  • Bankruptcy can erase your debts so you can walk away without paying, but you might have to give up some of the things you own in exchange. Debt consolidation loans don't reduce your debt, and you aren't required to give up any of the things you own.

Bankruptcy or debt consolidation: how to decide which is better

Deciding whether it makes sense to declare bankruptcy vs. consolidating debts comes down to where you are financially and where you want to be. 

If you've tried your best to pay off debts, but you're getting nowhere, or your creditors threaten to sue you, bankruptcy might be a viable option. Some bankruptcy attorneys offer free debt consultations. It might be worth booking an appointment to discuss whether you're eligible. 

On the other hand, you might decide to consolidate debts if you want to streamline your payments for less strain on your budget. 

Leave debt behind, so you can move forward

Get rid of your debt and free up your cash flow without a loan or great credit.

What if you can't get a loan and you don't want to file for bankruptcy?

An alternative to debt consolidation and bankruptcy is to resolve your debts.

Debt resolution means negotiating with creditors to accept less than you owe. Creditors may be willing to negotiate if they believe you can't afford to repay your debts in full, and negotiating is their best option. Debt resolution is for unsecured debts like credit cards and unsecured personal or private loans. You can negotiate on your own or get help from a company that specializes in resolving debt. 

What are the benefits? You don't have to borrow money or even be able to qualify for a loan. You also don't have to give up your assets or let a court dictate how you should handle your debts.  

A debt resolution program can often be completed in two to four years.

If you're ready to explore your options, get a free debt evaluation to learn what solutions might be right for you.

Rebecca Lake - Author

Rebecca is a senior contributing writer and debt expert. She's a Certified Educator in Personal Finance and a banking expert for Forbes Advisor. In addition to writing for online publications, Rebecca owns a personal finance website dedicated to teaching women how to take control of their money.

kim rotter 2022 2

Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

Frequently asked questions

Consolidating debt isn't the same as bankruptcy. When you consolidate debts, you use a loan to pay off your other debts. After that, you repay the new loan according to the lender's repayment terms. 

With bankruptcy, you ask a court to erase your debts or give you time to repay them under an approved plan.

There are several ways to get rid of debt without filing for bankruptcy. You can use a debt consolidation loan to streamline payments, work with a credit counselor to pay off your debts in full without a consolidation loan, or negotiate with your creditors to accept less than you owe. A debt consultant can help you weigh all the options to find the right one.

When a lender does a hard credit check as part of a loan application, that can have a temporary negative impact on your credit profile. Your credit can recover over time.

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