When you are struggling with large amounts of debt, you may be seeking out options to help you get your finances back under control.

In doing your research, you’ve probably read about debt consolidation or bankruptcy. Both of these are viable options, but the two are not the same.

You’ll need to carefully evaluate your financial situation to determine which is best for you. Here’s what you need to know.

Debt Consolidation 

Debt consolidation can make it easier to get out of debt. In this process, you’ll take out a new loan to repay your existing debts.

While the amount you owe won’t change, you may be able to claim a lower interest rate, which can reduce the total amount you’ll pay over the life of the debt.

Having a single loan simplifies your monthly repayments as well, as you’ll only need to pay one creditor as opposed to several.

Pros 

One of the best things about a debt consolidation loan is that you’ll have an end date in sight.

When you take out the loan, your repayment terms will be set over a period of several years. The specific length of your loan will depend on the amount you borrow, your credit rating and the specific lender you choose, as will your interest rate.

Having a specific date to be debt-free can take a huge weight off your shoulders.

Cons 

Debt consolidation isn’t without risks, though. Paying off all of your other debts at once can make you feel as though you have money available to spend, even though you’ll still need to repay your new loan.

The temptation to start running up credit card debt again could put you in even worse financial trouble.

What’s more, you’ll need to have a decent credit score to begin with or have a cosigner who does, which can make this option inaccessible to many who need it most.

Bankruptcy 

In bankruptcy, you are admitting that you are no longer able to meet your debt obligations.

If your bankruptcy filing is approved, the court may claim your assets to repay your debts, including your car, home and other valuable property.

Pros 

While bankruptcy is the more extreme of the two options discussed here, it gives you the chance to essentially press the reset button on your finances.

You likely won’t have many assets remaining, but you won’t have any debt either. This way, you can begin working to rebuild your credit rating over time.

Cons 

Losing your assets is the biggest drawback to bankruptcy, but this can be a small price to pay to get you back on your feet financially.

However, you will have difficulty obtaining any new credit in the years following bankruptcy, as filing bankruptcy will harm your credit score.

You’ll also need to pay solicitor and court fees for your filing. These costs can be quite high, so you’ll need to be prepared to pay them.

Is Debt Consolidation Better than Bankruptcy, or Vice Versa? 

As with many questions in the financial realm, this one doesn’t have a definitive answer; whether debt consolidation or bankruptcy is best for you depends on your specific circumstances.

If your financial situation is relatively stable and you have merely gone a bit overboard with the credit cards, debt consolidation can help you get a handle on everything.

As this option is less severe than bankruptcy, it is likely a better choice in this situation.

However, if you are in serious financial trouble and find yourself drowning under your debts, a debt consolidation loan may only prolong the inevitable. In extreme scenarios, bankruptcy is likely a smarter option.

Moving debt around will only leave you struggling for a longer period, while bankruptcy can get you back on solid ground more quickly.

Need Help Deciding? 

If you are still unsure which debt reduction method is right for you, we’ll be happy to help you weigh your options.

Here at Debt Negotiators, we offer free advice for those in need, and we tailor our recommendations to your unique situation.

Reach out to us today to learn more about our services and how we can help you become debt-free once and for all!