The $20,000 Debt Scenario
| Cost Component | Consolidation Loan (15% APR, 5yr) | DMP (3% rate, 5yr) | Debt Settlement | Chapter 7 |
|---|---|---|---|---|
| Principal repaid | $20,000 | $20,000 | $10,000-$14,000 | $0 |
| Interest paid | $8,560 | $1,550 | $0 | $0 |
| Origination/setup fees | $600 | $50 | $0 | $0 |
| Monthly/program fees | $0 | $2,400-$3,600 | $3,000-$5,000 | $0 |
| Attorney fees | $0 | $0 | $0 | $1,000-$2,000 |
| Filing fee | $0 | $0 | $0 | $338 |
| Tax on forgiven debt | $0 | $0 | $1,500-$2,500 | $0 |
| Total out of pocket | $29,160 | $24,000-$25,200 | $14,500-$21,500 | $1,338-$2,338 |
| Timeline | 5 years | 5 years | 2-4 years | 3-4 months |
The $30,000 Debt Scenario
| Cost Component | Consolidation Loan (15%, 5yr) | DMP (3%, 5yr) | Chapter 7 |
|---|---|---|---|
| Principal repaid | $30,000 | $30,000 | $0 |
| Interest paid | $12,840 | $2,325 | $0 |
| Fees | $900 | $2,450-$3,650 | $0 |
| Attorney + filing | $0 | $0 | $1,500-$2,800 |
| Total out of pocket | $43,740 | $34,775-$35,975 | $1,500-$2,800 |
| Savings vs consolidation loan | -- | $7,765-$8,965 | $40,940-$42,240 |
On $30,000 of debt, Chapter 7 bankruptcy saves $40,000+ compared to a consolidation loan. Even compared to a best-case DMP, bankruptcy saves over $32,000. And it takes 3-4 months instead of 5 years.
The $50,000 Debt Scenario
| Cost Component | Consolidation Loan (18%, 7yr) | Chapter 7 | Difference |
|---|---|---|---|
| Principal | $50,000 | $0 | $50,000 |
| Interest | $37,200 | $0 | $37,200 |
| Fees | $2,500 | $2,800 | ($300) |
| Total | $89,700 | $2,800 | $86,900 saved |
| Timeline | 7 years | 3-4 months | 6.5+ years saved |
Hidden Costs of Consolidation
The numbers above only include direct financial costs. Consolidation carries additional hidden costs:
- Opportunity cost: Money spent on consolidation payments could be saved, invested, or used to rebuild. Over 5 years at $600/month, that is $36,000 in earning potential lost.
- Stress and health costs: 3-5 years of tight budgets and the constant risk of falling behind takes a documented toll on mental and physical health.
- Risk of failure: With under 50% completion rates, there is a better-than-even chance you will pay thousands and still end up needing bankruptcy -- at which point you have lost both the consolidation payments and the time.
- No legal protection: During consolidation, creditors can still sue you. A single lawsuit can wipe out everything you have paid toward the consolidation.
The Break-Even Formula
Total cost of consolidation = Principal + Total interest + All fees + Tax on forgiven debt (if settlement)
Total cost of Chapter 7 = Filing fee ($338) + Attorney fee + Credit counseling (~$40)
If consolidation total > bankruptcy total, bankruptcy is the cheaper option.
For most people with more than $10,000 in unsecured debt, bankruptcy is significantly cheaper. Use the interactive calculator to run your own numbers.
Related Resources
Interactive Calculator -- Enter your numbers and compare total costs
How Much Does Bankruptcy Cost? -- Complete guide to filing fees and attorney costs
Success Rates -- Completion rates that affect total cost