Debt Consolidation vs. Chapter 7 Bankruptcy, Part 2: When Bankruptcy is Better than Debt Consolidation

This article is a continuation of our previous article, “Debt Consolidation vs. Chapter 7 Bankruptcy, Part 1: Advantages and Limitations of Debt Consolidation.” In that article we discussed when debt consolidation may be a good alternative to bankruptcy. In this article, we’ll discuss some of the situations in which bankruptcy may be the best option.

When is Bankruptcy Better than Debt Consolidation?

Debt consolidation doesn’t work for everyone. If the debtor doesn’t have enough income to pay the loan payments in addition to their living expenses, then even if they qualify for a loan they’ll likely end up in the same situation in a short period of time. Many people need to wipe the slate clean and get a fresh start. This can be achieved directly through a Chapter 7 bankruptcy, which wipes all debts except a few non-dischargeable debts like taxes, child support or student loans. The downside of a Chapter 7 bankruptcy is that the bulk of your non-exempt property and possessions will be sold and the proceeds divided amongst your creditors. A clear slate can also be achieved in a Chapter 13 bankruptcy after completion of a repayment plan that pays a portion of un-secured debts and discharges most of the rest.

If creditors are suing or threatening to sue a debtor to obtain a court judgment and begin garnishing wages or bank account funds, a debt consolidation loan will do nothing to stop those lawsuits or collection efforts until the loan goes through and those debts are paid. That can take several weeks. Depending on where things are in the process, the debtor may not have time to secure a consolidation loan before the judgment is entered or the garnishing begins. However, a bankruptcy’s automatic stay requires ALL creditors to immediately cease collection efforts and court actions until the stay is lifted, the bankruptcy resolved (Chapter 7 only) or the repayment plan completed (Chapter 13 only).

Bankruptcy has many other advantages and disadvantages as well. These options should be discussed with an experienced bankruptcy and debt management attorney before deciding on a course of action. Your attorney’s experience and familiarity with debt issues can save you a great deal of money and hassle in the long run.

In Maryland bankruptcy attorney John Burns and his firm can assist in identifying a workable and advantageous solution to your debt issues and help you take action toward a resolution. Call our office at 301-441-8780 to schedule an appointment or e-mail us at

Debt Consolidation vs. Debt Management Programs

Don’t confuse a debt consolidation loan with a debt management program. A debt management program does not eliminate your many debts. Instead, your single payment is divided among your creditors by the debt management agency, who also takes a portion of your payment. Some programs are good, especially non-profit and government agency sponsored programs, but many private sector programs are nothing more than scams in which the management firm is the only one who gets paid and debtors often end up in worse shape than before.