Bankruptcy vs Debt Consolidation

Understand Your Options - Part 2

This is the second in a series regarding Bankruptcy vs Debt Consolidation. It is not an easy decision on which course of action to take, so I  have compiled pros and cons to better guide you and to help you understand the ramifications as it relates to credit repair.


Another process sought after by those in a deep debt is filing for a bankruptcy. This is a process where usually all your debts are discharged, meaning they are no longer obligations and you are given a fresh start.

There are two types:

Chapter 7 bankruptcy:  This method of debt relief works by liquidating majority of your non-exempt assets - you will have to check with your state for the particulars of what these assets are - to pay your creditors. Any remaining obligations are usually discharged.

Chapter 13 bankruptcy:  Chapter 13 is similar to a debt consolidation only that it is a court supervised process. It reduces the amount of your financial obligations and makes you follow a repayment plan for about 3-5 years after which your debt will be discharged.


  1. Once you file for bankruptcy a stay will be put on all previous suits filed against you and it forbids creditors to file any new suits against you.
  2. Unlike debt consideration, bankruptcy covers even secured debts.
  3. In Chapter 13, you are allowed to keep your assets and also your debt amount decreases significantly. Also in certain cases the court may ask you to pay 10% of your unsecured liabilities, if you meet certain criteria. And in case you meet these criteria then the rest of your debt will be eliminated.
  4. It gives you a fresh start as you are not liable to any debts that are filed in your bankruptcy.


  1. In bankruptcy vs debt consolidation the major negative effect of bankruptcy is that your credit score gets affected very badly if you file for a bankruptcy, and also it takes up to 10 years to recover your credit after a Chapter 7 or 13.
  2. This type of solution is a public record and anyone can get access to this information.
  3. Filing for it costs a lot of money and the lawyers usually demand payment upfront, as there is a chance you may not qualify for a bankruptcy.
  4. Credit repair is an option after you file and get discharged. Though there is no guarantee that this will come off your credit report.

Pitting debt consolidation vs. bankruptcy between each other we can see that neither of them is by any means an easy choice. The best choice for you is dependent on your present financial situation. So it would be wise to explore your options thoroughly before making the choice between the two.

Go To Part 1 Debt Consolidation vs Bankruptcy

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