Debt Consolidation vs Bankruptcy

Is Debt Consolidation or Going Bankrupt Better?

I‍t Depends on Your Circumstances.

Dealing with financial strain can be a challenging and stressful task. Two commonly explored solutions are debt consolidation and bankruptcy. But which is better? This article explores the key distinctions between these two debt relief strategies and introduces a third option – the consumer proposal.

Unpacking Debt Consolidation

Debt consolidation is essentially the process of taking out a new loan to pay off a multitude of existing debts. Such loans can take various forms, including unsecured bank loans, secured loans, second mortgages or home equity loans.

Advantages of Debt Consolidation

The primary benefit of a debt consolidation loan is that it can save you money, thus facilitating quicker debt repayment. The catch is that the interest rate on the consolidation loan needs to be lower than the rates on the debts being consolidated. By paying less in interest, you can pay off your debt more swiftly.

Risks Involved in Debt Consolidation

However, debt consolidation comes with its own set of pitfalls. First, qualifying for such a loan may prove challenging, and you might require a co-signer. The lender would typically want to see a steady income, consistent employment, and a good credit score before approving the loan. You might also lack sufficient security or collateral for the loan.

Moreover, unlike bankruptcy, your debts do not disappear with a debt consolidation loan; they are merely restructured. You still have to pay off the consolidation loan in full. Your monthly payment with a consolidation loan might also be higher than in bankruptcy.

Understanding Bankruptcy

Bankruptcy is a legal procedure where you formally declare that you cannot pay your debts. You surrender your assets in exchange for the discharge of your debts. A note about your bankruptcy filing will appear on your credit report and stay there for six years.

Advantages of Bankruptcy

Bankruptcy allows you to wipe off your debts rather than simply refinancing them. There are no eligibility criteria for bankruptcy; it’s a choice you make when you can’t afford your debts. It also offers protection from creditor actions like wage garnishments.

Duration of Bankruptcy Process

If it’s your first time filing for bankruptcy, the process can be completed in as little as nine months. However, if you have a high surplus income, this period gets extended to 21 months.

Exploring a Middle Ground: Consumer Proposal

Interestingly, there’s a third option that sits between debt consolidation and bankruptcy – a consumer proposal. This solution, available under the Bankruptcy & Insolvency Act, is another way to consolidate debts without filing for bankruptcy.

Just like debt consolidation, a consumer proposal groups all your debt payments together. However, with a consumer proposal, you only pay back what you offer to pay back. It’s a legally binding form of debt settlement that reduces your debt, offering reduced monthly payments and creditor protection.

Making the Choice: Debt Consolidation or Bankruptcy

Deducing the right debt management solution depends entirely on your unique situation. The choice between a debt consolidation loan or bankruptcy hinges on your debt amount and your repayment capacity. Consider the following:



A consumer proposal combines the benefits of debt consolidation and the debt relief of bankruptcy.

If your debts are overwhelming and you can’t afford the monthly payments of a debt consolidation loan, bankruptcy might be your best bet. While the impact of bankruptcy or a consumer proposal on your credit score can be worrisome, it’s essential to consider an alternative that offers a fresh start.

For personalized advice and guidance on these debt management solutions, it’s recommended to seek a free consultation from a financial advisor or a debt management professional. They can help you weigh the pros and cons of debt consolidation, bankruptcy, and consumer proposal, and guide you towards a debt-free future.

Find Your Personal Debt Relief Solution

Licensed Insolvency Trustees are here to help. Get a free assessment of your options.

Discuss options to get out of debt with a trained & licensed debt relief professional.