Bankrupty Attorney and Law Professor’s Guide to Consolidating Debt and Saving Money

Thank you for joining me for my latest YouTube video. The full discussion is available on my channel via the video at the end of this post. The key topics covered are: the strategic use of personal loans, their impact on credit standing, and the critical legal risks they pose during a bankruptcy filing.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Updated on October 29, 2025.

I. Strategic Debt Consolidation: Interest Rate Arbitrage

The use of personal loans for debt consolidation is essentially an exercise in interest rate, converting high-APR debt into low-APR debt.

1. The Power of Installment Conversion

Personal loans are a valuable financial tool for saving money by converting high-interest revolving debt like credit cards, typically 18–30% APR, into a single installment loan with a lower, fixed interest rate, often below 15% APR. This conversion guarantees a fixed repayment schedule and a definitive end date, resulting in substantial savings because of the reduced interest rate.

2. Credit Card Balance Transfer as an Alternative

If qualification for a personal loan is not possible, a credit card balance transfer remains a viable, short-term alternative. Many issuers offer introductory APRs, sometimes as low as zero percent, for a defined promotional period (typically 6 to 18 months). This period provides a crucial window to pay down principal debt without the burden of interest. Just make sure to pay off the debt as much as possible before the higher default APR takes effect.

II. Credit Profile Management: Revolving vs. Installment Credit

Consolidation loans do more than just lower your interest. They can also help organize your credit file in a way that boosts your FICO score

1. Reducing Credit Utilization

By moving credit card balances onto a personal loan, the revolving credit lines are often zeroed out. Since credit utilization (the ratio of debt to available credit) accounts for roughly 30% of a FICO score, eliminating balances on these revolving accounts can lead to an immediate and significant improvement in the overall credit score.

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2. Diversifying the Credit Mix

Personal loans are categorized as installment credit (fixed payments, fixed term), whereas credit cards are revolving credit (flexible payments, indefinite term). Maintaining both types of credit successfully demonstrates a healthy credit mix to lenders, which contributes positively to the credit rating. That’s because a personal loan is often more difficult to obtain than a credit card.

III. The Primary Pitfall: Falling into Debt Again

While consolidation can be highly beneficial, it introduces a severe risk: the temptation to utilize the newly freed credit lines.

1. The Risk of Increased Debt Burden

After consolidation, credit card accounts often maintain their original high credit limits with a zero balance. The temptation, or necessity due to an emergency, to use this readily available credit can lead to a far worse financial situation. The individual is left servicing the original, consolidated debt (the personal loan) and the newly accumulated credit card debt, dramatically increasing the overall debt load and heightening the risk of default.

IV. Legal Considerations in Bankruptcy: Timing and Intent

As I discuss in detail in the video, discharging personal loans in a Chapter 7 or Chapter 13 bankruptcy requires careful timing and analysis of the funds’ usage, often facing heightened scrutiny from the bankruptcy trustee.

1. Trustee Review of Post-Loan Spending

The trustee will review what the loan proceeds were used for. If a substantial amount of the personal loan was used for non-essential expenses such as luxury purchases, vacations, or high-end goods—shortly before the bankruptcy filing, this can raise objections. This could result in your bankruptcy being denied or having to pay back that debt.

2. The 90-Day Preference/Fraudulent Intent Period

While the rules primarily target cash advances and luxury goods on credit cards, the timing of a large personal loan just before filing can be problematic. A large, recent debt taken out when the borrower had no intent or ability to repay can be viewed as an issue of fraudulent intent, or at least poor pre-petition planning.

In some cases, to ensure a smooth discharge and avoid motions to dismiss or exclude the debt, a bankruptcy lawyer may advise delaying the filing and continuing payments on the debt until it falls safely outside the most scrutinized time windows. This is why a thorough, pre-filing consultation is absolutely essential, and you must be 100% honest with your lawyer.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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