Definitions

• Debt consolidation is when all your debts are consolidated into one large loan, usually by a private debt consolidation company, and you then make monthly, affordable payments to the company until your debts are completely paid off. Chapter 13 bankruptcy is a procedure that allows you to restructure your debt load with the help of the court and a trustee, so that you can make affordable payments for a preset number of years. Chapter 7 is a type of bankruptcy in which you walk away from all debts.
  
  

Advantages

• Debt consolidation, if you can afford it, is the best option for your credit, because your credit score will not take a hit. When a debt consolidation company issues you a consolidation loan that you then pay back directly to the company, all your debts get paid in full. Additionally, such companies often negotiate with your debtors to lower amounts owed. Similarly, a Chapter 13 bankruptcy allows you to fulfill some of your financial obligations by making monthly payments that fit within your budget. After five years of repayment, you are free from any remaining debts. In a Chapter 7 bankruptcy, all your debts are wiped clean, so you have nothing to pay back.
  
  

Disadvantages

• Debt consolidation will get the creditors off your back, but you are still liable for most, if not all, of your original debt. Debt consolidation companies also often charge fees for their services. On the other hand, both types of bankruptcies will stay on your credit report for 10 years, making it very difficult for you to qualify for new lines of credit.
  
  

Qualifying

• Almost anyone can qualify for debt consolidation. Some debt consolidation companies require that consumers have $10,000 or more in debts to qualify for their programs, but others do not. To qualify for a Chapter 13 bankruptcy, you must have a regular income. You will only qualify for a total debt discharge under Chapter 7 if you do not have regular income and can prove that your income is less than the state’s median income.
  
  

Considerations

• Before deciding on one of these approaches, be sure to consider the pros and cons carefully. While a bankruptcy will make you seem like a huge risk to lenders for many years to come, debt consolidation may not end up being the good deal it seems at first. You will likely end up paying your entire debt balance, but stretched over a long period of time, with the addition of service fees charged by the consolidation company.