When you’re drowning in debt, you basically have two options. Debt consolidation or bankruptcy. The question is “which one is right for your situation?”

The best option for you will depend on a number of variables including the amount of debt you have, what kind of debt you have, and what your available assets look like. Debt consolidation or bankruptcy are two of your available options, but they are definitely not equal in terms of impact on your life.

Debt Consolidation

The basic idea behind a debt consolidation loan is you have multiple debts, credit cards, lines of credit, personal loans, and that sort of thing, and you take out a single loan and consolidate them all together.

You go from multiple payments with multiple different interest rates and replace it with a single payment, usually with a much lower interest rate than you were paying before.

When it comes to debt consolidation, there are two different types of loan: unsecured and secured.

An unsecured debt consolidation loan is a loan that is usually made by an institution like a bank to consolidate things like credit card debts. Typically the interest rate is lower than the rates on your credit cards, so it can potentially make sense to use this kind of service.

A secured debt consolidation loan normally takes the form of a Home Equity Line of Credit or second mortgage against your home. Since the loan is secured with the equity in your house, the interest rate is typically much lower than an unsecured debt consolidation loan.

The impact of each kind of debt consolidation loan on your credit can vary.

When you consolidate your debt using your home equity, your unsecured debts are reduced to a zero dollar balance. As long as the accounts remain open, your credit score will be positively affected every single month from that point.

If you close those accounts out of precaution against falling into bad habits again, your credit score will decline. This is because the credit agencies take your credit history into account when calculating your score.

debt consolidation or bankruptcy

One of the downsides to a debt consolidation loan is that since debt consolidation loans have a longer repayment period than other kinds of debt, it may take you longer to pay off the total amount.

The advantages include reducing your monthly payments, lowering the interest you pay, and potentially increasing your credit score.

Read More: Rebuilding Credit And Improving Your Credit Score


There are two forms of bankruptcy, the traditional bankruptcy and a consumer proposal.

With a consumer proposal, you work with an insolvency trustee like Harris and Partners to settle with your creditors and make an alternative offer of repayment.

While a consumer proposal will not clear out your debt entirely, creditors generally agree to erase a substantial portion of the debt in exchange for an agreement to make payments at regular installments over a set period, not exceeding 5 years.

A traditional bankruptcy allows you to restart on a new footing, which may have an appeal if your debts are simply too large to manage, and you cannot propose to pay any significant portion of it soon.

Further, although bankruptcy proceedings may be complex, a first time bankruptcy generally lasts only 9 months and the costs are relatively minimal.

The downsides to a bankruptcy are the lasting impact on your credit score and the use of your assets to repay your creditors. This could include the sale of your house and car if your debts are large enough.

Generally, a bankruptcy or a consumer proposal should be an option of last resort, especially if you have equity in your home that you can use to secure your debts against.

Before you choose debt consolidation or bankruptcy, it’s a good idea to speak to a professional. Reach out to an Ardent Mortgages agent today. We specialize in helping home owners refinance their home and reduce their debts while increasing their cash flow.

Call us at 519-772-7615