When you are struggling with bills you cannot afford to pay, you might have some confusion about the various debt relief options. From debt counseling to mortgage modification, debt consolidation to bankruptcy, how can you determine which route is best for your financial situation and your future? 

Start your research with this guide comparing the benefits and drawbacks of debt consolidation and bankruptcy. 

Definition and process 

Debt consolidation involves taking out a single loan to repay several older, high-interest debts. This strategy gives you one monthly payment, ideally with a lower interest rate and fewer fees. However, you must have the credit to qualify for a new loan and the income to make the payments as agreed. 

With Chapter 7 bankruptcy, you can request discharge of eligible debts. Chapter 13 bankruptcy reorganizes your debts to create an affordable repayment plan based on your income and assets. 

Credit impact 

The impact of debt consolidation on your credit score depends on the amount of debt and the size of the new loan. Often, taking this step can help you rebuild credit by showing old accounts as paid in full. However, if you miss payments on the new loan or continue to open new credit cards and accounts, you may end up deeper in debt. 

Bankruptcy filings stay on your credit report for seven to 10 years. Most people who file for bankruptcy have a history of late payments that has already lowered their credit score. While the filing itself will lower your FICO score, many individuals find they can qualify for new credit right away thanks to the clean slate bankruptcy provides. You may be able to qualify for a mortgage as soon as two years after filing. 

Eligibility 

It can be difficult to qualify for an affordable debt consolidation loan with a credit score below 650. Conversely, credit does not influence eligibility for a bankruptcy filing. However, you must fall below a certain income threshold depending on location and household size to qualify for Chapter 7. Otherwise, you can reorganize your debts with Chapter 13. 

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