Debt Consolidation vs. Bankruptcy: Which is Better?

debt cosolidation vs. bankruptcy

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Struggling to pay your bills on time? You’re not alone. According to one 2017 survey, 50% of American families are living paycheck to paycheck, 31% of Americans have less than $500 set aside in savings, and 19% have no emergency fund at all.

When finances are that tight, consumers have no choice but to resort to borrowing for day-to-day purchases, and a layoff or medical emergency can push a family deep into debt. If you find yourself staggering under the weight of your debt, you may be considering debt consolidation or bankruptcy. While no solution is one-size-fits-all, you may be surprised to discover that the best solution for your situation isn’t what you originally thought.

The Truth about Debt Consolidation

But first, what is debt consolidation? Debt consolidation is a type of loan that rolls all your debts into one, ideally at a lower interest rate.

On its surface, a debt consolidation loan has undeniable appeal: you get to pay off all your debts at once, trading multiple, higher payments for one smaller payment. However, it pays to remember that this type of loan, like any other financial product a bank offers, is designed to help the bank make money, possibly at your expense. Consider these downsides of the debt consolidation loan:

1) There’s no guarantee your consolidated interest rate will be lower than the rate on your current debt

2) It can be risky if you haven’t changed your spending habits. Once you pay off your credit cards, you’ll have a lot of credit tempting you to spend again

3) Your monthly payments might go down, but you could be in debt longer

Think you’ll just prepay the debt before the term is up? Think again. Many consolidation loans have prepayment penalties, and those that don’t might get their interest in a sneakier way. If your loan terms include pre-computed interest, you can give up hope of paying it off early, because the lender has calculated the interest that will be due over the life of the loan and added it to the account balance up front. Even if you pay off your 5-year loan in 3 years, you’ll still pay 5 years’ worth of interest.

Let’s do the math on a debt consolidation scenario. Say you have $5,000 of debt on a credit card with 18% interest, $8,000 of debt on a credit card with 14% interest, and another $1,800 of medical debt. You pay $127 per month on card #1, $186 per month on card #2, and $30 per month on the medical bill, for a total payment of $343 each month. You spot a 5-year debt consolidation loan offer at 11% interest, so you roll your combined $14,800 of debt into one account, with a one-time origination fee of 5%, or $1,200. All your debt is now in one place, but your monthly payment has actually gone up—to $348 per month—and you have a tempting $13,000 of available credit to use.

Suddenly, this option doesn’t seem so attractive anymore. As you can see, consolidating debt doesn’t eliminate it—it prolongs it.

Is Declaring Bankruptcy the Right Choice for You?

Do any of these situations sound familiar?

1) You have a large debt you can’t afford to pay back

2) You don’t have many large assets

3) You don’t plan to make major purchases requiring a loan in the next few years (e.g. buying a car or home)

If so, you may be a strong candidate for bankruptcy. With bankruptcy, you’ll:

1)  Get a fresh start

2) Have your debts discharged

3) Stop foreclosures, repossessions, wage garnishments, and utility shutoffs

4) Get relief from creditors and peace of mind

5) Ultimately pay pennies on the dollar for your debts

When you’re comparing debt consolidation vs. bankruptcy, all you have to do is look at the numbers. Debt consolidators want you to believe you’re getting a good deal, but in reality, you may just be keeping yourself in debt longer—or even falling deeper into debt. With lower costs, faster results, and a higher rate of success, it’s clear that bankruptcy is the better option.

Signs it’s Time to Think about Bankruptcy

Consider bankruptcy when:

– You can’t make the minimum payments on your debt

– You’re using credit for necessities like food or gas

– Your mortgage is underwater

– Bill collectors are calling

– You’re facing foreclosure or repossession

– You’re facing wage garnishments or creditor lawsuits

A Financial Visual of Debt Consolidation & Bankruptcy

Take a look at our full infographic to help you see if debt consolidation or bankruptcy is right for you.

Erase Your Debts and Start Anew

The process of declaring bankruptcy can seem complex and intimidating, but you don’t have to go it alone. Your St. Louis and southern Illinois bankruptcy attorneys at Benson Law Firms are here to help you through every step of the process, from determining which type of bankruptcy is right for you to collecting documentation and filing on your behalf. Let us help lift the weight of debt from your shoulders. Contact A Bankruptcy Law Firm, LLC today to schedule your free consultation.


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