Many people ask me what the differences are between Bankruptcy and Debt Consolidation.

Debt Consolidation entails getting a loan from a bank which is large enough to pay off your existing debts – thereby ‘Consolidating’ your debt into one loan and one payment. This requires that the consumer applying for the loan have good enough credit to obtain the loan.  Debt consolidation can be an advantage as most debt consolidation loans have a lower interest rate making it less expensive to pay the debt off over time.  A debt consolidation loan does not eliminate interest and so it may still take a significant amount of time to pay off the debt.

Bankruptcy allows a consumer to ‘Discharge’ their debts in order to obtain a fresh start.  There are primarily two chapters that consumers use when filing bankruptcy – Chapter 7 and Chapter 13.  A consumer does not have to have good credit to file a bankruptcy.  In most Chapter 7 cases there are no payments – this is dependent upon your assets and household income.  A Chapter 13 bankruptcy includes a payment plan where the payment is normally related to your household income or assets.  A Chapter 13 plan can also be used to save a home or car that is in arrears.   For many consumers a bankruptcy allows them to obtain a discharge of their debts and improve credit immediately without having to pay their entire outstanding debt.  Another advantage that bankruptcy has vs. debt consolidation:  bankruptcy can stop a garnishment or lawsuit.

If you are considering either debt consolidation or bankruptcy consult with a professional to help you compare each given your current situation.