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Bankruptcy vs debt consolidation?

Fort Myers, FL |

I have about a total of $18,000 in credit card debt with three major credit card carriers. I own a home. I'm trying to determine if bankruptcy or debt consolidation is best. My understanding is with chapter 13 bankruptcy I still would have to make payment arrangements and such similar to debt consolidation. So instead of damaging my credit even more with a bankruptcy, is it best to try one of these debt consolidation firms? Try to contact and settle with creditors myself? Or file bankruptcy?

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Attorney answers 5


I have heard many stories of debt consolidation companies taking large fees and doing nothing, while making false promises. So, if you are not going to file bankruptcy, you are probably better off negotiating with the companies yourself. However, paying debts over a long period of time with interest could be very costly, and possibly more expensive than a Chapter 13. In addition, if you qualify for Chapter 7 instead, you may be able to discharge the debts while paying very little.


Your question is absolutely best answered with a consultation with a bankruptcy attorney -- most offer free consultations and you can find one at the link below.

I will say a Chapter 13 bankruptcy has the benefit that, once the plan is confirmed, the creditors have to accept your new payment schedule and no interest accumulates. If they violate the bankruptcy plan, you have legal options.

With a debt settlement plan, you pay more than for a bankruptcy and the carriers do not have to agree to your plan. Interest accumulates and you may likely get sued. You can still settle after a suit is filed, but that will be on your credit, the months and months of delinquencies will be on your credit, and the settlement instead of "paid in full" will be on your credit. So credit-wise, I am not sure one is better than the other unless you can get agreements very quickly and pay off lump sums.

Debt consolidation usually means you get another loan to pay off these three and then make a lower monthly payment -- so that drags the whole thing out.

You have not said you are behind or struggling with the $18K in debt either -- did you become recently unemployed or have major medical issues? If you just do not like the $18K in debt, I would also suggest you look at plans to reduce your spending drastically for a year or so and get things paid off in that way. Dave Ramsey has good suggestions and I find him to be more realistic and less judge-y than some planners or advice-givers.

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You should probably consult with both a debt settlement attorney as well as a bankruptcy attorney both usually have free consultations.
There is a difference between debt consolidation and debt settlement. Generally, debt consolidation involves a person who is not delinquent on any debt yet needs to consolidate their debts for a reduced payment. How this is accomplished varies, but usually it involves some type of loan- sometimes even a mortgage. If you are going to try debt consolidation make sure you get all the facts first.
Debt settlement usually involves someone who is delinquent or about to become delinquent on their debt and needs to settle the account for less than the full balance. Most credit card companies have different methods of handling these issues. But before you try to settle on your own make sure you consult with an attorney about what you should and shouldn't do (e.g. get the offer in writing before you make a payment).

I hope this helps!

NOTE: This Answer does not constitute legal advice. Every case is fact specific. To render a legal opinion, an attorney must engage in a consultation with a prospective client and review any pertinent documents. This communication does not create an attorney-client relationship with Attorney Rochelle N Belnap or Belnap & Forbes, PLLC.


Some debt consolidation firms at scams. They will charge you a large up-front fee and then monthly charges. Others, such as Credability and are more reasonable.

The problem, if you want to call it a problem, is that with a debt-consolidation you will be paying 100% of the principal balance, plus interest. In a Chapter 13, you would not be paying interest, and typically less than the full amount of the principal balance.

In a Chapter 13, there is no negotiation with unsecured creditors. You make a proposal to pay money to the Chapter 13 Trustee in a Plan. The money paid to the Trustee is then divided amongst the creditors. As long as the amount you propose to pay meets the Bankruptcy Code requirements, the unsecured creditors have no say whatsoever.

The amount of the payment will depend on several different formulas. It may well be that the payments in the Chapter 13 will be higher than the payments in the consolidation plan. Or it may well be that you will wind up paying 100% of the principal balances. Or it may be that the amount of the payment will be less than what you would have to pay in a consolidation program.

And, lets not forget the actual cost of the bankruptcy. A Chapter 13 is a very technical and complex form of bankruptcy, much more so than a Chapter 7. I would never recommend that a person try to do it themselves. So, that means attorney's fees. And the Trustee charges a % for every monthly payment.

So, here is where I have to stop and urge you to consult with a bankruptcy attorney. Most do not charge for initial consultations. Get an idea as to what the costs are to you, and then you are in a better position to make an informed decision.

Good luck to you.

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The first thing to keep in mind is that there is a difference between debt consolidation and debt resolution. Debt consolidation does not necessarily focus on resolving the debt but rather making the payments more digestible. Debt resolution on the other hand aims at settling the debt without having to go through bankruptcy. The debt resolution approach is not for every person and yes, bankruptcy is needed under various circumstances.

Depending on who the creditors are, the negotiation timeline can vary. If you decide to undertake this approach, it is no different than other practice areas - get a lawyer! Seek out a LAW FIRM AND NOT a debt settlement company to handle the negotiations. There are law firms in Florida which handle debt resolution. Getting consultation from a bankruptcy attorney is also a good idea because that attorney could offer alternatives to resolving the debt besides bankruptcy.

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