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What is the difference between bill consolidation and filing bankruptcy?

To put it simply: bankruptcy is the end of the line.  It’s what you should do when you’ve exhausted all other financial avenues.  Because a bankruptcy can stay on your credit report for ten years, it can affect financial transactions in the future – such as getting loans, applying for credit cards, or even finding a new apartment.  So while debts are cleared away from a bankruptcy, it will have a long-lasting impact. 

Debt consolidation on the other hand, involves paying off debts with a debt consolidation loan and then paying off that one individual consolidation loan.  Your debts are paid off like they are with a bankruptcy, but your credit worthiness remains intact.  Your outstanding credit cards, auto loan, student loan, or whatever the case may be, has been paid off, which reduces your overall burden.  There are several major advantages of debt consolidation:

  1. Your interest rate will be lower than the combined interest rate for several outstanding loans. 
  2. The overall amount of debt can be lower.
  3. This means that your monthly payments will be lower.
  4. You’ll still have access to credit card accounts.  As the consolidation loan has paid off your credit cards, you will have new access to credit.
  5. Your credit rating can be repaired because the number of outstanding debts has been reduced.  Even if the interest rate and debt amount remains the same, the number of outstanding debts has been reduced, making you less of a credit risk. 
  6. You will be less prone to defaulting because you only have one debt to pay, instead of several.

BankruptcyIn some cases even the above advantages are not enough to keep you above water.  Basically, bankruptcy is what you should choose after you try debt consolidation and you still are at risk of continually defaulting on your payments.  This is why bankruptcy is the last step in the process and why debt consolidation should be your first move if you’re trying to get out of a serious amount of debt. 

What is Covered by Consolidation

Bankruptcy may also be necessary if you have accrued a significant amount of certain types of debt.  Consolidation is mainly useful for unsecured debt, such as credit cards.  It is not as useful for mortgage payments, a home equity loan, or car payments.  However, there are debt consolidation firms that will help to consolidate a variety of loans, so you should not immediately file for bankruptcy if you have outstanding car or student loans. 

All this makes it sound as if consolidation is the best way to go: it lessens the burden on your credit rating and lessens the amount of payments.  However, bankruptcy does have some advantages in that it will stop legal proceedings placed by any creditors.  At the same time, both debt consolidation and bankruptcy will ensure that your creditors will stop calling and trying to collect payments.  With consolidation, this is only the case if the consolidation plan has paid off your outstanding debts or if you’ve made good on these payments for another reason. 

Finally, with bankruptcy there is no minimum for the amount of debt needed to declare bankruptcy.  This is not always the case with consolidation.  Similarly, there are no age restrictions if the person is no longer a dependent. 

BankruptcyNational Bankruptcy Firms

It should be no surprise that bankruptcy is on the rise.  As a result, there is a long list of bankruptcy firms to help with the issue. 

The Bankruptcy Firm PC  (801) 392-8200
Law Offices of Peter Francis Geraci 1-888-456-1953
Pleska and Douglas, LLC (770) 933-8101
Vedder Price (202) 312-3320
Debt Relief USA 1-800-936-6618
The Port Law Firm (561)-296-6400
Frego and Brodsky, P.L.C. 1-800-978-4788
Legal Helpers 1-800-260-1402
Kelley Drye (212) 808-7623


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