Debt Consolidation vs. Bankruptcy: Everything You Need to Know

In the case of domestic debt repayment, it usually begins around six months of borrowing the money. However, many people still find it hard to return the amount, especially post-Covid-19 when most of the people have lost their jobs and businesses have taken a significant hit. 

The question is, what to do when you don’t have enough money to return the loan? How to repay the debt without hurting your current financial condition even more? Well, there are a few debt plans that can help you in such a desperate situation. 

Two of them happen to be debt consolidation and bankruptcy. Let’s have a look at both of them, their pros and cons, and see which one works best for you. 

Debt Consolidation 

Debt consolidation is a kind of debt refinancing that involves taking one loan to pay off the other. It refers to going through a personal finance process of individuals addressing domestic or consumer debt. However, it also sometimes refers to a state’s fiscal approach to consolidating the debt of the government. 

It is usually recommended when an individual is unable to pay the debt from his pocket or settle the debt. Of course, it’s a hassle to take another loan when you already have to pay, but it’s better than declaring bankruptcy. Let’s say it’s a lifeline that can save you from bankruptcy. 

Pros and Cons of Debt Consolidation 

Debt consolidation is usually a great idea for people who have multiple debts with high-interest rates. As you know, paying off the debt is one thing, but paying it off along with the interest fee is entirely another story. Consolidation loans come with a low-interest rate; thus, it’s easier to return them. 

On the other hand, it’s not as simple as you think. You can get a consolidation loan with a low-interest rate only if you have a good credit score. For those who have a bad credit score, managing a consolidation loan may not be an option at all. Plus, it won’t solve any of your underlying financial issues.


If you’re unable to pay your debts and your finances are almost breaking down or have broken down already, bankruptcy is an option. It’s usually the last resort. People go for bankruptcy when nothing else works. Filing bankruptcy means discarding all your previous debts and restarting from square one. 

There’s a proper bankruptcy code for every country and all cases of bankruptcy are handled in federal courts according to the state laws. The petition for bankruptcy can be filed by anyone, the individual himself, by spouses together, by any other entity, or by a company in case of corporate debt.

Pros and Cons of Bankruptcy 

In case of tax liabilities older than three years, filing bankruptcy can make them go away. Not to mention, if you’re unable to make debt payments on time, it can significantly hurt your credit score. The same goes for defaults, so bankruptcy is a safe option in such a scenario. 

Nothing can prevent you from aggressive collection actions of your creditor apart from bankruptcy. Declaring bankruptcy is the only way to tie up your creditor’s hands and arms and free yourself from this mess. It can initially feel defeating, but it’s the only thing that can provide you with a fresh start. 

However, just like other debt plans, bankruptcy also has its downside. You may lose some of your luxury possessions if you declare bankruptcy and it’s also going to hurt your credit score until you build yourself again. Thus, choose wisely whatever you do.


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