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Is it Better to File for Bankruptcy or Debt Consolidation?
by
JG Wentworth
•
April 30, 2025
•
6 min
When drowning in debt, two major lifelines often come to mind: bankruptcy and debt consolidation. Both options can provide relief, but they work in fundamentally different ways and have vastly different impacts on your financial future. If you’re on the fence as to which is the better option, let’s take a closer look at the key factors to consider when deciding between bankruptcy and debt consolidation…
Bankruptcy: A legal fresh start
Bankruptcy is a legal process that provides relief to individuals who cannot pay their debts. The two most common types for individuals are:
- Chapter 7 bankruptcy: Often called “liquidation bankruptcy,” this involves selling non-exempt assets to pay creditors. Remaining eligible debts are then discharged.
- Chapter 13 bankruptcy: This “reorganization bankruptcy” allows you to keep your assets while repaying debts through a 3-5 year court-approved repayment plan.
Debt consolidation: Streamlining your obligations
Debt consolidation combines multiple debts into a single loan or payment plan, typically with a lower interest rate or monthly payment. Common approaches include:
- Debt consolidation loans: Personal loans used to pay off multiple debts, leaving you with one payment.
- Balance transfer credit cards: Transferring high-interest debt to a card with a low introductory rate.
- Debt Management Plans: Similar but distinct from straightforward debt consolidation, this approach involves working with a credit counseling agency to create a repayment plan with potentially reduced interest rates.
Impact on credit score
- Bankruptcy: Creates a significant negative impact on your credit report. Chapter 7 remains on your credit report for 10 years, while Chapter 13 stays for 7 years. Your credit score will likely drop by 100-200+ points initially.
- Debt Consolidation: Generally has a less severe impact on your credit score. Taking on new credit temporarily lowers your score, but making consistent payments can improve it over time. Missing payments on a consolidation loan, however, will damage your credit.
Debt resolution
- Bankruptcy: Chapter 7 can eliminate most unsecured debts completely. Chapter 13 may allow you to pay back only a portion of unsecured debts while making full payments on secured debts.
- Debt consolidation: Does not reduce the principal amount you owe—it simply reorganizes the debt. You’re still responsible for repaying the full amount, though potentially with lower interest.
Eligibility requirements
- Bankruptcy:
- Chapter 7 requires passing a “means test” to prove your income is below your state’s median or that you don’t have enough disposable income.
- Chapter 13 requires regular income and debt amounts below certain thresholds ($465,275 unsecured and $1,395,875 secured as of 2023).
- Debt consolidation: Typically requires a decent credit score (usually 650+) to qualify for favorable terms. Lower scores may still qualify but with higher interest rates.
Timeline
Bankruptcy: Chapter 7 typically completes in 4-6 months. Chapter 13 plans last 3-5 years.
Debt consolidation: Loan terms typically range from 2-7 years, though some may extend longer.
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Costs
Bankruptcy:
- Filing fees ($338 for Chapter 7, $313 for Chapter 13).
- Attorney fees ($1,500-$3,500 for Chapter 7, $3,000-$5,000 for Chapter 13).
- Credit counseling fees ($50-$100).
Debt consolidation:
- Origination fees (typically 1-8% of loan amount).
- Balance transfer fees (usually 3-5%).
- Potential annual fees.
- Interest charges over the life of the loan.
Which debts can be addressed?
Bankruptcy:
- Eliminates: Credit card debt, medical bills, personal loans, utility bills.
- Does NOT typically eliminate: Student loans, tax debt, child support, alimony, court judgments.
Debt consolidation:
- Works well for: Credit card debt, medical bills, personal loans.
- Not suitable for: Secured debts (mortgages, auto loans), tax debt, student loans (though these have their own consolidation options).
When to consider bankruptcy
Bankruptcy might be the better option when:
- Your debt-to-income ratio is extremely high (typically above 50%).
- You’re facing aggressive collection actions including foreclosure, repossession, wage garnishment, or lawsuits.
- You primarily have unsecured debts that can be discharged.
- You’ve tried negotiating with creditors without success.
- You have little to no ability to repay your debts even with reduced interest rates.
- You need immediate relief from debt collection activities (bankruptcy triggers an “automatic stay”).
When to consider debt consolidation
Debt consolidation might be better when:
- Your debt is manageable but the interest rates or payment structures are problematic.
- You have good enough credit to qualify for favorable consolidation terms.
- You have a stable income that can cover the consolidated payment.
- You want to avoid the credit impacts of bankruptcy.
- Your debt issue is primarily due to high interest rates rather than principal amounts.
- You want to preserve your ability to obtain credit in the near future.
Future financial goals
- Bankruptcy: Will significantly impair your ability to obtain credit for 2-5 years, though rebuilding is possible. Major purchases like homes may be difficult for several years.
- Debt Consolidation: Preserves more financial flexibility but ties up your income for the loan term.
Tax implications
Bankruptcy: Discharged debt generally isn’t considered taxable income.
Debt consolidation: No direct tax implications, though interest on some consolidation loans may be tax-deductible if used for specific purposes (consult a tax professional).
The bottom line
Bankruptcy offers a more complete solution for overwhelming debt but comes with more severe long-term consequences. Debt consolidation provides less immediate relief but preserves more financial options for the future. The “right” choice depends on your specific situation, including the amount and types of debt, your income stability, asset protection concerns, and future financial goals.
Before making any decision, consult with both a credit counselor and a bankruptcy attorney to get professional advice tailored to your situation. Many offer free initial consultations that can provide valuable perspective.
There’s always JG Wentworth…
If you have $10,000 or more in unsecured debt there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
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* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.