Debt Consolidation vs Bankruptcy

Debt Consolidation vs Bankruptcy

When considering your options to deal with debt, many people will explore the idea of a debt consolidation loan before considering bankruptcy. Whether a debt consolidation loan or bankruptcy is right for you depends on how much you owe and how much you can afford to repay. There is also a third option between a debt consolidation loan and bankruptcy – a consumer proposal.  A consumer proposal provides the benefits of debt consolidation with the debt relief of bankruptcy.

Debt consolidation

Traditionally, debt consolidation involves taking out a new consolidation loan to pay off multiple debts.  For example, if you have three different credit card debts that total $15,000, a loan company may give you a debt consolidation loan for $15,000 and you would use that money to pay off your credit cards.  You’re replacing three old debts with one new debt.

The advantages are that you now have only one monthly payment to make. If the interest rate is lower on your new loan it saves you money. By paying less in interest you can eliminate credit card debt sooner. And lowering your monthly payment can help you balance your budget.

Sometimes debt consolidation loans won’t work for you.

There are risks when taking on a debt consolidation loan that you need to consider.

You may not qualify or may need a co-signer. Any consolidation lender will want to see you have a steady income, employment, and a good credit rating before approving the loan. You may not have enough security or collateral to support a consolidation loan.

Debt consolidation does not eliminate debt, it trades old debt for new debt. Debt consolidation loans also require discipline. If you qualify for the loan and then you continue to incur new debts again on your credit cards, you’re essentially increasing your debt load which can lead to future financial problems. Consolidating debts through a second mortgage can put your house at risk if you can’t keep up with the payments.


If your debt load is overwhelming and you can’t afford the monthly payments on a debt consolidation loan, then bankruptcy is an option.

Bankruptcy in Canada is a legal process of clearing yourself of all the debts as opposed to refinancing them through a debt consolidation loan.  You don’t need to qualify to file for bankruptcy; it’s a choice you make. 

However, as mentioned, there is a solution between a debt consolidation loan and bankruptcy.

A consumer proposal is another way to consolidate debts without filing bankruptcy.

debt consolidation vs bankruptcy

In the same way a debt consolidation loan groups all your debts into one payment, a consumer proposal can legally consolidate your debts through a Licensed Insolvency Trustee except this time, instead of paying all the principal debts plus interest, you’re only paying back what you offer to pay back. That’s because a consumer proposal is a form of debt settlement that is legally binding.

Debt consolidation vs bankruptcy

In conclusion, a debt consolidation loan does not eliminate debt, it replaces multiple old debts with new debt. Bankruptcy is a legal process to eliminate debt.  A consumer proposal both consolidates debts into one new payment and provides debt relief like bankruptcy.

Finding the right way to solve a debt problem depends on your specific circumstances. Contact us today for a free consultation and let’s get started on creating your debt-free plan.

Similar Posts:

  1. Consumer Proposal vs Debt Consolidation
  2. Debt Management Plan or Debt Consolidation Loan. Which Makes More Sense?
  3. Failed Debt Consolidation. Now What?
  4. Can Debt Consolidation Hurt Me Financially?
  5. Should I Get A Debt Consolidation Loan? Pros and Cons

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