Being overwhelmed by debt can leave you feeling without options. But there are several ways you can lower your balances, including debt consolidation and bankruptcy. Both have pros and some significant cons and should be considered carefully before you make any decisions. 

You may ultimately want to engage the help of a bankruptcy attorney or an attorney who specializes in debt relief. But first, learn the basics to help narrow down which solution is better for your personal situation.

Debt consolidation is the process of combining multiple debts into a single loan with more favorable terms. There are several goals you can potentially achieve with a debt consolidation loan:

There are several different options to choose from, including taking out a debt consolidation loan or enrolling in a debt consolidation program. Here are a few common strategies, how they work, and when they do and don’t make sense.

One way to achieve credit card debt consolidation is to transfer multiple balances onto a single card. Credit card companies often offer a low or 0% introductory APR for several months to new or existing cardholders, which can help you slash debt during that time. However, many charge a balance transfer fee, such as 3%, that is added to your balance. They may also back-charge interest if you miss a payment. 

Perhaps most importantly, any remaining balance once the promotional period expires will accrue interest at the card’s regular APR (annual percentage rate), which could be well over 20%, depending on the company. So if you can’t pay off or significantly pay down your debt during the promotional period, this strategy may not make sense for you. 

The best debt consolidation loans have a lower rate than what you’re currently paying and minimal fees. One benefit of a personal loan is that it gives you a fixed time frame to pay off your debt and you know how much you owe each month. Another is that most personal loans are unsecured, meaning you don’t need to put up collateral, like your home or car, to get the loan.

However, debt consolidation loans for bad and fair credit can be costly. Additionally, you may have to pay an origination fee, which is a percentage of the loan amount that’s added to your balance. Prequalify with online lenders to compare APRs and look for those that don’t charge an origination fee. 

Tip: The average interest rate on a two-year personal loan is 11.48%, according to the most recent data from the Federal Reserve. The average credit card interest rate is much higher, at 20.09%.

A home equity loan or line of credit uses the equity in your property as collateral for a debt consolidation loan. Interest rates are usually more competitive than unsecured personal loans because the home is used as collateral. But that also means you risk losing it if you default on the home equity loan. If you expect to struggle with payments on a secured loan like this, it’s best to consider other measures to reduce your debt.

Relative to bankruptcy, debt consolidation helps you avoid a massive, long-lasting hit to your credit score, while offering potentially lower payments on your debt. 

On the other hand, you typically need a decent credit score or a cosigner to qualify for the best debt consolidation products. Plus, many lenders and credit card companies charge fees that increase the amount you owe. It may also take longer to become debt-free compared to filing for bankruptcy. 

Bankruptcy is a legal process that provides individuals or businesses with relief from overwhelming debt. The two most common types of bankruptcy for individuals are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Each has its own eligibility requirements and exemptions, as well as different impacts to your debt and credit. 

Chapter 7 bankruptcy can clear virtually all of your debt, but hits your credit the hardest. If eligible for Chapter 7, you would sell non-exempt assets through a trustee, the proceeds going toward your debt with any remaining debt discharged. 

However, most filings are “no asset,” meaning that most of your assets would be considered exempt and the court could not claim them. In these cases, the entirety of eligible debts would be discharged. Exemptions vary by state. For example, some states have a homestead exemption that allows you to keep your primary home, no matter how much equity you have in it. 

While a Chapter 7 bankruptcy can wipe the slate clean, it impacts your credit score for up to 10 years and not everyone qualifies. If your monthly income is higher than your state’s median income, you must pass a means test to qualify. 

Important: To avoid bankruptcy, contact creditors to arrange repayment agreements at a lower interest rate or for a reduced amount.

Instead of liquidating assets, Chapter 13 bankruptcy places you on a payment plan with your creditors. The payments last between three and five years depending on your income. If your mortgage is one of your delinquent debts, you have the chance to make up payments and stop foreclosure. Discharge of the remaining debt occurs after the final payment is made. 

Chapter 13 bankruptcy may be an option if you’re not eligible for Chapter 7. Chapter 13 stays on your credit report for seven years. 

If you’re able to qualify for a debt consolidation loan with affordable payments, it’s probably a better option than filing for bankruptcy. However, if your credit score is already suffering and you expect to default on a loan or put other assets at risk (such as assets that would be exempt in bankruptcy), bankruptcy may be the better option. 

Bankruptcy can provide immediate relief from overwhelming debt and allows you to rebuild your finances and start saving for future goals. But bear in mind, bankruptcy will stay on your credit for at least seven years (10 if you file Chapter 7). Plus, if you have very valuable assets, such as expensive jewelry, you may be forced to liquidate it in a bankruptcy.

There are stark differences when considering filing for bankruptcy vs. debt consolidation. Your decision depends on many individual factors, such as:

Important: Credit counseling is a first step in filing for bankruptcy, but may reveal alternative ways to manage debt without bankruptcy. 

Debt consolidation and bankruptcy aren’t your only options for overcoming high debt balances. Here are some alternatives that could make sense for you.