Ultimate Guide to Credit Card Consolidation compared to bankruptcy, which is right for you?

How Much Do You Have to Be in Debt to File Chapter 7 Bankruptcy?

In short, there is not a specific amount of debt a person must have before the person files for bankruptcy relief. If you owe $5,000 in credit card debt, you could file for bankruptcy relief. On the other hand, while there is no specific amount you need to file Chapter 7 bankruptcy, it does not automatically guarantee you can file Chapter 7. Specifically for Chapter 7, you must pass the means test. 

Chapter 7 Means Test and Income Limits

The Chapter 7 bankruptcy means test uses your gross income (income before taxes) to help determine whether you are eligible to file Chapter 7 bankruptcy. There are two parts to Chapter 7 means Test. The first part uses IRS-allowed expenses to help determine whether you may qualify. The second uses your actual expenses.

Many individuals can use an online Chapter 7 means test calculator to estimate if they could possibly pass a Chapter 7 means test. A common question asked when filing a Chapter 7 is will I lose my car if I file bankruptcy? Well, that depends on which state you reside in and its exemptions.

Chances are good if you’re reading this article, you’re trying to regain control over your debt situation.  If your experience resembles mine in any way, then you’ve also realized when you Google Credit Card consolidation, most results are biased. In fact, most online content comes from biased companies peddling you their services–something that just doesn’t inspire much confidence in their advice.

What is Credit Card Consolidation?

Credit card consolidation is the process of taking several outstanding credit cards and merging them into one single loan.  The goals for consolidating debt would be the simplify the payment process (having to only pay one lender instead of dozens), and hopefully, reduce your overall interest expenses by getting a new loan with interest rates lower than any of the individual loans you’ve consolidated.

Is Credit Card Consolidation my Only Option?

As a debt counselor, I receive many calls from people looking to escape a bad debt situation by seeking a new loan.  Regardless of whether this is the right decision for them, they often don’t realize they have other options they can consider.  Understanding all those options can be incredibly confusing, especially since they all have similar names.  So before we dive further into Credit Card Consolidation, I want to provide a brief overview of what options exist outside of credit card consolidation.

Paying off Your Debt

Do this the old-fashioned way, by reducing your spending and applying those savings to pay off your creditors:

Pros:  It feels good to do it yourself.  It best affects your credit score too.

Cons:  It can take a while and requires a lot of discipline.  It might also be more costly than credit card consolidation if your interest rates are real high.  Also, it might not be enough if you’re completely swamped in debt

Recommendation:  If you do not have much debt, or if your rates are not astronomical, this is the most honorable approach.

Do nothing:

For all your credit card debt and most other unsecured loans (excluding student loans, childcare, and liens) if you do nothing for 7 years, technically your slate is wiped clean and the creditors can no longer legally pursue you or ding your credit score anymore.

Pros:  You don’t have to pay anything

Cons:  Your credit score can be destroyed for 7 years. You will suffer the agony of being hounded by collections agencies for years on end.  These will still continue even after 7 years. Although the collectors have no more legal rights to pursue the money from you, they will still harass you in hopes that you’ll pay up out of ignorance.

Recommendation:  I would not recommend this, especially if your debt is large.  Chances are good you’ll get sued at some point by the creditors, which means going to court and wage garnishments.

Debt Management Plan:

These are offered by nonprofit organizations that help consolidate and then renegotiate your interest rates with your creditors. This option can be an alternative to debt settlement.  They usually charge a monthly fee. Legally it can’t be over $79 a month, but most run around $25 a month.

Pros:  They have minimal impact on your credit score

Cons:  Their program lengths can run for 5 years. The exposure to fees can easily be $1,500 or more before you’re done

Recommendation:  You can use these if you don’t have a lot of debt and you can be quickly in and out of the program.

Debt Settlement Plan:

Debt Settlement, also known as Debt Relief, is a service where debt settlement companies withdraw a predetermined amount from your bank account each month. The funds are placed into an escrow account.  Please note that an individual can settle his/her debt on their own as well. This option is often an alternative to bankruptcy.  They then negotiate with your creditors to reduce your overall debt amount. The money comes from the account they have been saving up for you to pay off that debt.  

Pros: You can get out of debt within 2 years and pay as little as 27% of your original debt. Although, it averages out to be around a 55% discount

Cons: To get your creditors to be willing to negotiate, you’ll have to let your bill payments fall behind.  If they aren’t already behind, this could have a big impact on your credit score. We wrote an article estimating debt settlement credit score impact. Also, many debt settlement programs charge exorbitant fees up to 25% of your original debt amount.  This often leaves debtors paying more than if they had just stuck with their original payment schedule.

Recommendation: There are many Debt Settlement Companies where the representatives are not honest with their counsel or their high settlement rates. If you use debt settlement, make sure you find a good company. I encourage you to go through an exhaustive list of pros and cons and always ask about their rates and payment plans. Steve Rhode from has a great article if you are considering Debt Settlement vs Debt Consolidation.

Payday Loans & Title Loans:

These are a loan of last resort.  The rates are so high that it rarely makes sense to use these as options for getting yourself out of debt.

Pros: You get instant cash

Cons: The exorbitant interest rates will keep you in the debt cycle.

Recommendation:  I can go into horror stories here, but just please take my advice and avoid these.

Pros and Cons of Credit Card Consolidation

Types of Debt and Where to Consolidate Them

Before you decide to consolidate your debt, you should know that not all loans are created equally.  Some types of debt are better suited for consolidation than others.

Mortgage – Mortgages are considered secured loans, which means that the bank is using your house as collateral for giving you the loan.  If you don’t make your monthly payments, then they repossess your house. While this sounds cruel, it allows them to offer you lower interest rates than any unsecured lender could give you.  As such, it doesn’t make sense to consolidate your mortgage.

Rather, if you find your mortgage payments over overbearing, you should consider either refinancing your mortgage or downsizing homes.  Refinancing usually only makes sense if market rates are now lower than when you originally bought the home.

Many people are tempted to take a second mortgage or a Home Line of Equity against their home to consolidate their debt.

Certain lenders will only give you a personal loan if you offer collateral, such as a car or the title to a home.  I would strongly recommend against this because you’d essentially be trading down. In summary: don’t trade unsecured debt for debt that requires collateral.  It’s a bad deal.

Car Loan – Car loans are similar to mortgages in that they are also secured loans.  As such, you will rarely benefit by trying to consolidate your car loan. If your car payments are too high, I would honestly recommend you simply trade in your vehicle for one whose payments you can more easily handle.

Credit Card Loan – Credit card loans are the ideal loans to consolidate.  Credit Cards tend to have much higher interest rates than personal loans, which means you can save a significant amount of money by switching your debt from a credit card to a personal loan.

Medical bills – For all intents and purposes, medical bills are similar to credit card debt.  Some hospitals may make you take out a Care credit card to pay off your bills. Others may simply send you the bill with or without any late fees attached.  If there are no late fees, then you simply run the risk of having your credit score affected if you fall behind on payments. You can also ask for a payment plan. They will usually refer you to the Care credit card or a similar program.  In such a case, it would be best to compare the rates they offer against the rates you can procure if you were to consolidate the date on your own.

Student loans – Student loans are considered low risk for lenders because you cannot escape them through settlement or bankruptcy.  Unless you’re willing to skip town and move to India, chances are good that you’ll have to eventually pay that loan back.  As a result, student loans tend to have interest rates that are as low as home mortgages. Because of this, you will probably not find any savings benefits from consolidating your student loans.

Way to Consolidate Debt

If you have a credit score above 600, you might qualify for a lower-interest credit card consolidation loan. This would allow you to pay off your more expensive credit card bills.,, and are popular websites for personal loans that are cheaper than what your local bank will offer. Because these websites often look at more factors than your bank when qualifying you for a loan, they might also be willing to work with you even if your local bank won’t.

If you have excellent credit, you can also qualify for certain credit cards that offer 0% APR for balance transfers for the first year.  This will buy you 12 months of funding interest-free to pay off your debts.

Buyer Beware:  If you know you don’t have fiscal discipline, then stay away from this strategy.  Better yet, cut up those credit cards. I’ve come across too many customers that tried to consolidate their debt by taking out a personal loan. The moment they receive the cash, they spend it all and instead get only further in debt.  Needless to say, the same goes for the credit card. If you can’t pay off your bills in 12 months, then don’t do it.

Pitfall to Be Aware

As I’ve mentioned before, I’ve come across many situations where people have tried to consolidate their loans, but the moment they get the cash, they spend it on an “emergency” rather than paying off their original, high-interest loan.  They end up in an even bigger hole with twice the debt. If you have any possible inclination of falling into this trap, then please avoid credit card consolidation. It would be more beneficial to consider the other options that we mentioned before.

One of the gimmicks that many people fall for is they trade one loan for another. This is compelling because the new loan has lower payment plans.  However, if the new loan has a much longer lifespan than the original loan, you could be paying for additional years. Also, you can even end up paying even more out of your pocket than if you stuck with your original loan.  

As such, I recommend that you always compare apples with apples, and oranges with oranges. When comparing loans, look specifically at interest rates, and look at how much in interest you’ll have to pay out over the life of the loan.  If one loan is less in both scenarios, then it’s clearly the winner. Just don’t choose the plan that has the lower monthly payments. It could be a trap.

Credit Card Consolidation Alternatives

There are four main alternatives to credit card consolidation. I will go through each of them one by one:

  1. Debt Management: Debt management is through a debt management program where the goal is to reduce your interest rate.
  2. The payoff on your own: This method is to continue paying off on your own often through either the Avalanche or Snowball method.
  3. Debt Settlement: This method is where an individual or service negotiates for a lower amount owed on the debt.
  4. Bankruptcy: There are two main options: Chapter 13 and Chapter 7. Chapter 7 is more severe and wipes out your unsecured debt. Chapter 13 is a restructuring of your debt. So before you make a decision, be sure to familiarize yourself with the bankruptcy process.

Save Time Through Credit Card Consolidation

I often get phone calls from people asking for a loan. Although we’re not in the business of offering loans.  Some people try and call anybody they can find, hoping somebody will give them a loan. This can be pretty tiring. Typically, if one lender declines to give you a loan, chances are good most other lenders will also decline you.

If it’s a constant challenge to receive a consolidation loan, then you may want to review your credit report. Your report will alert you to which factors are preventing you from obtaining a loan.


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