Many years ago, in what seems like another life-time, I royally screwed up my credit. At the time, I had three options; 1.) file for bankruptcy, 2.) apply for a debt consolidation loan, or 3.) ignore my credit problems until they went away.

At first, I thought about filing for bankruptcy. However, I didn’t like the fact that I’d have to wait at least 7 to 10 years before my credit improved. To me that sounded like an eternity. Though bankruptcy was definitely an option for me, having amassed a small fortune in credit card debt, I was just too stubborn to actually go through with it.

Next, I applied for a debt consolidation loan. But since I wasn’t ready to truly confront my budgeting issues and resolve my debts; this option turned out to be more of a headache than a solution. I eventually defaulted on the consolidation loan as well, continuing my pattern of irresponsibility.

Finally, what I decided to do, or not decided to do depending on how you look at it, was ignore my problems with the hopes that they’d magically disappear. Of course, this was an infantile way to resolve my problems. I avoided collectors’ calls, I discarded late-payment letters, eventually my debt was turned over to numerous collection agencies that made my credit report look like a complex flow-chart making it difficult for me to match up the original debt with the current collection agency.

To make a long story short, I ended up “waiting” 7 years to clean up my credit. Thankfully, during those 7 years I began to develop a basic understanding of budgeting and responsible credit usage. That allowed me to build a positive credit history while I waited to dispute my old negative credit items.

Since I didn’t own a house or a car in my name (meaning there was nothing to liquidate), ignoring my debt issues ended the same way a bankruptcy would have resolved my debt issues; which brings me to comparing and contrasting bankruptcy vs. debt consolidation.


There are two types of personal bankruptcy; Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is a complete liquidation of all assets that are turned over to the courts to pay the debtors. In most cases, the remaining debt is written off. A Chapter 13 bankruptcy allows you to keep some of your assets, but sets up a payment plan with your debtors. Here is a quick summary of bankruptcy:

  • Bankruptcy filings are not free – most filing fees range around $300
  • Paper work is crucial – gathering all of the needed paperwork takes time and you need to know what to gather: a credit report, all of your debtor information, and your tax returns as an example.
  • Credit score – a bankruptcy can stay on your report up to 10 years. Though you can rebuild your score during this time, you most likely won’t receive the best interest rates until the bankruptcy is completely removed.

Debt Consolidation

An alternative to filing for bankruptcy is to sign up for a debt consolidation loan. The loan company negotiates lower interest rates with your original debtors and creates one combined payment you make to them and they distribute the payments to your debtors. The key to successfully making this loan work is creating a reasonable budget making sure you can pay the monthly payment. Some key points about debt consolidation:

  • One payment instead of multiple payments – this is one of the benefits of a consolidation loan; instead of keeping track of all of your payments, there is only one to make.
  • Lower interest rates for a fee – most debt consolidation companies negotiate lower interest rates with your original debtors, but this normally isn’t free of charge. The fees are rolled into your monthly payment.
  • Responsibility – without any budgeting or money management skills, the possibility of reverting back to skipping payments is greater than 50%.

I learned money management lessons through the school of hard knocks and can now say my credit is in the “excellent” range. Though for anyone in a similar situation, be sure to weigh all of your options and learn how to create a budget. Which is the lesser of two evils? I’ll let you decide.


  1. Sustainable PF Reply

    I think debt consolidation is the easy choice here assuming you can afford to do so. Why destroy your credit for the better part of a decade if you don’t have to?

    • @Sustainable PF – Thankfully in my case this is all old history. All of my negative debt is now gone, completely removed off my credit report and my credit score is in the ‘excellent’ range since I had 7+ years to work on building better money habits. But for many people, debt consolidation may be a better option if they want to keep their credit in tack.

  2. I use to get stuck on how good or bad my credit score was. I find many people also get a little too focused on it. If you need a loan or your job depends on it should be a priority. My home owners insurance can increase with bad credit. Other than that I don’t plan to borrow money from anyone but myself at this point so it’s a real low priority.

    • @Molly on Money – It’s funny, but once I learned my score was finally above 720, I stopped obsessing about it so much. I still need to check it sometime this year, but I won’t be as stressed out about it until it comes to buying a house.

  3. I’m glad you got out of all those messes! It’s interesting to hear the options from someone who has been there.

  4. Squirrelers Reply

    That’s a really good story, and one that can help others realize that it’s possible to recover from a flawed approach to money management. I’m guessing it couldn’t have been an easy process, but clearly you got it done to the point of having excellent credit scores. Good stuff.

    • @Squirrelers – I would definitely advise anyone in the same position to make a budget, then tackle their debts instead of letting them linger until they were just old. I learned the hard way!

  5. retirebyforty Reply

    So did you pay back the debt? It sounds like you consolidate the debt and then ignore the collector. What happens next?

    Fortunately, I haven’t had to deal with this situation.

    • @Retireby40 – A couple of them I paid off through a credit card program that transferred the debt to a credit card I made payments on. This actually helped me build my credit back up by building up a payment history. However, a few of them I never paid. They were written off to collection agencies and after 7 years, I was able to dispute them and they fell off my credit report. It’s a fallacy that negative items “fall” off a credit report, a person needs to dispute old items to have them removed. If I were to advise anyone in a similar situation, I would say they need to form a budget and then pay off their debts instead of the “wait and see” method that I used.

  6. You’ve been through some extraordinary times *and* came out smiling! From almost bankruptcy to a credit score of above 720 is truly amazing!

    Thanks for the nice explanation on the debt consolidation and bankruptcy. Your story will be an inspiration to anyone who is contemplating bankruptcy.

Write A Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.