Debt Consolidation - is it a smart alternative to bankruptcy?

We have all heard of debt consolidation. In debt consolidation you borrow from one lender to repay other debts. The most common example would be getting a bank loan to repay your credit card debts.

The advantage is obvious. You pay off high interest rate debts with a lower interest rate loan, so you pay less in interest, which means you get out of debt faster.

How do I know if debt consolidation is a better than bankruptcy for me?

Here are the questions you should ask yourself to determine if debt consolidation is your best bankruptcy alternative:

Do you qualify for a debt consolidation loan? To qualify for a debt consolidation loan, you need an income to repay the loan. If you are not working, or if you don't earn enough to repay the loan in a reasonable amount of time (up to five years), you won't qualify for a consolidation loan.

Do you have security for the debt consolidation loan? If you own a house that is worth more than your current mortgage, you may be able to use your house as security for your loan. A car or investments can also be used as security. A secured debt consolidation loan carries a lower interest rate than an unsecured loan.

If you own your own home, read our articles on Getting a Mortgage to Pay off your Debts and on Three ways to borrow against your house as a bankruptcy alternative for more information on using your home as security for a debt consolidation loan.

How much can you afford to repay each month? This is a difficult question for most people to answer. Start by making a personal budget to determine what you can afford to pay each month. If you can only afford to repay $300 per month, but the debt consolidation loan will cost you $700 per month, a debt consolidation loan is not the answer for you.

Is your income stable? Before entering into a five year repayment plan on a loan, make sure your income is stable. You might be able to make the payment this month, but what will happen if your hours get cut back next month, or if you get laid off? Your payments don't stop when your income falls, so make sure the payments are reasonable.

If you don't qualify for a debt consolidation loan, or if you can't afford to repay it, consider, credit counseling, Chapter 13 Wage Earner Plans, or a consumer proposal as your best bankruptcy alternatives.