If you are considering debt consolidation or filing for bankruptcy, you are probably overwhelmed by debt. Filing for bankruptcy is a complex process that involves extensive research on exemption laws, filling in numerous forms, and following court rules. A mistake can cost you non-exempt assets, a denial of your bankruptcy petition, and possible fraud charges.

Debt consolidation is an alternative debt handling strategy. It is a debt relief plan where debt counselors develop a customized debt management formula to provide you with a predictable avenue out of debt. However, numerous debt consolidation companies are looking to take advantage of your financial troubles.

A meticulous and experienced attorney will relieve you of worry and help you make the right choice. Are you confused about debt consolidation vs. bankruptcy? At Los Angeles Bankruptcy Attorney, we have the experience and resources to advise you on your best options. We will develop a unique solution to lower your debt levels and meet your individual needs.

To make the right choice, it is critical that you understand the pros and cons of both debt consolidation and bankruptcy.

Debt Consolidation

This process involves combining all your unsecured debt into one and allowing you to make a single monthly payment at a lower interest rate. Most debt consolidation companies will work with your creditors to lower the interest rates on your unsecured debt. There are several debt consolidation options available for you.

Debt Consolidation Loans

You can combine your separate debts into a single debt consolidation loan. The amount of debt you owe remains the same, but the monthly payments and the interest rate will be lower. Unlike a personal loan, a debt consolidation loan is specifically for offsetting the consolidated debt. The lender controls the loan and pays off your debts, but this type of loan does not always benefit you. You will require a good credit score to get the loan, and if you want lower interest rates, you have to extend your repayment period. Longer repayment time means you pay more than your original debt.

Transferring Credit Card Debts

This option allows you to transfer balances from different credit cards to a single card. Additionally, some credit card issuers offer lower transfer rates to their new customers. Transferring your balance will allow you to pay one monthly amount on all your credit cards. If the terms of offer maintain a low-interest rate until you make full repayment, you will pay less interest in the period of repayment. However, if the low interest rates are for a limited period, you may end up paying a higher interest rate than you originally anticipated. In addition, consolidating credit card debts may affect your credit score for a while before you make noticeable progress in your payments.

Consolidation With Home Equity

If you have equity in your home, you can use the equity as collateral to consolidate your debts into a low-interest and possibly tax deductible loan. The amount you can borrow depends on your credit history, the fair market or equity value of your home, and your income. However, you risk foreclosure if you cannot keep up with payments.

Personal Loans

You can borrow a personal loan as part of your debt consolidation strategy. Since personal loans are unsecured, you do not need collateral, and the amount you receive will depend on your credit score. If you get the loan, you can use it to clear all other debts. You will then make fixed monthly payments to one creditor until the loan is fully paid. However, high-interest rates on personal loans could cost you more than your original debt.

Pros of Debt Consolidation

  1. Debt consolidation protects your credit rating and reputation. It is not public information, and though it may appear on your credit report, it does not lower your credit score.

  2. You can still have your credit cards unless prohibited by your debt consolidation agreement. However, if you have defaulted or owe a large amount of money, you may not be approved for more credit. In addition, continued use of the credit cards may nullify the reason for debt consolidation.

  3. With your debt consolidated, your debt is simplified to only one convenient payment per month.

  4. Lower monthly payments and interest rates are more manageable and will leave you with some money to cater for priority needs.

  5. You will be able to pay off your debts on a schedule that fits your income.

  6. You do not have to deal with unpleasant calls from multiple creditors.

  7. You do not need to file bankruptcy.

Cons of Debt Consolidation

  1. Although interest rates on your debts may be lower, debt consolidation may not be practical if you are struggling to pay for basic necessities.

  2. You may be required to operate only one account until you complete your debt repayment. This can be unfavorable if your debts will take several years to clear.

  3. It may cost you money in hidden fees. Lower monthly and interest rates extend your repayment period. The longer you take to pay, the more interest you will pay.

  4. If you use your property as collateral for a debt consolidation loan, you could lose the property if you default on repayments.

  5. In case your loan consolidation agreement has a cross-collateralization clause, you might lose property that the lender has financed if you default on the loan payments. Cross-collateralization allows you to use one property for more than one loan by the same lender. You can lose that property for defaulting on the loan even if the payments for that property are current.

  6. Any money that you save from debt relief may be considered income, and you have to pay tax on it. Your creditors may report your settled debt to IRS, and it will be considered taxable income.

  7. Debt consolidation does not offer protection from lawsuits brought against you by creditors.

  8. The cost involved may be too high to manage in addition to your existing financial problems.

  9. You must commit to paying off your debts within a fixed period of time.


Bankruptcy is when you legally declare yourself or your business unable to clear outstanding debts. Depending on the type of bankruptcy you file, a judge will issue a court order to establish a payment schedule or have most or all your debts legally discharged. If you declare your business bankrupt, your business will either close or continue operating with lower payments to creditors. The discharge will also forbid collection agencies and creditors from communicating with you.

If you are planning to file for bankruptcy, it is important to understand how your debts are discharged, how to protect your home and other properties from creditors and the effect of your bankruptcy on any co-signers. In addition, even after bankruptcy, you still have to pay most tax debt especially federal taxes. Bankruptcy law permits your tax debt to be discharged only under very limited circumstances.

Types of Bankruptcy

There are different types of bankruptcy that you can file based on your specific circumstances.

Chapter 7

Under the Bankruptcy Code, Chapter 7 allows your assets to be liquidated. They will be sold for cash to pay your creditors, but there is a limit. If you have very little nonexempt property, creditors with unsecured claims like credit cards will not receive proceeds. Such creditors can only receive payments if the case involves an asset for which the creditor has filed proof of claim in court. To determine your eligibility for Chapter 7, a “means test” is required. The test determines whether your income is too high for this category of filing.

Chapter 13

If you have a regular income, filing for bankruptcy under this chapter allows you to work out a schedule to repay your debts over a longer period, typically 3 – 5 years. Instead of liquidating them, you will be able to keep your valuable assets and pay creditors through a trustee.

The plan is based on your projected income over the period of bankruptcy, and you must complete payments first before receiving debt discharge. While the plan is operational, you are protected from lawsuits and other actions by debt collectors and creditors.

Chapter 7 vs. Chapter 13

The main difference between the two is that under Chapter 13, you remain in possession of your valuable assets while paying creditors through trustees. Chapter 13 applies if you own vast amounts of assets and property, but their income cannot cover the debts you owe. Chapter 7 is most common if you are filing as an individual or with your spouse. Additionally, the likelihood of your tax debt being discharged is higher in a Chapter 7 filing than in Chapter 13.

Chapter 11

You can file for bankruptcy under this chapter if you have a business and you would like to continue operating while you repay creditors. In this chapter, you have a right to file a reorganization plan including a disclosure statement that provides enough information for your creditors to evaluate the plan. You can reduce your debts by repaying some and discharging others, offloading contracts or leases, and reducing the workforce.

Chapter 12

This chapter is for fishermen and family farmers with regular annual income. Similar to Chapter 13, it allows you to repay your debts through a trustee over a period of three to five years if the court approves. The aim of Chapter 12 is to allow you to continue operating throughout the life of the payment plan.

Chapter 9

This chapter is similar to reorganization under Chapter 11 except that it applies to municipalities instead of businesses. It allows school districts, counties, towns, cities, and other municipalities to file for bankruptcy.

Pros of Bankruptcy

  1. Defaults, repossessions, missed payments and lawsuits hurt your credit more. They are also more complicated to manage than bankruptcy when dealing with a future lender.

  2. Bankruptcy protects you from aggressive collection plans by creditors.

  3. Filing for bankruptcy is a reality check to help you start afresh and start rebuilding your credit sooner.

  4. Old tax liabilities that are older than three years may go away.

  5. It will save you from embarrassing letters and calls from creditors, lawsuits and declined charge authorizations.

  6. You cannot be sued for any debt.

  7. There are lenders whose business specialty is lending to “bad risks.”

  8. Most of your property may be bankruptcy exempt which allows you to keep the property.

Cons of Bankruptcy

  1. Most of your tax debt is not dischargeable.

  2. It will lower your credit rating for a while before you rebuild it.

  3. Filing for bankruptcy now may make it harder to file again if something worse happens.

  4. You still have to pay your student loan.

  5. You will lose possession of your credit cards.

  6. Filing for bankruptcy is embarrassing and a way of accepting defeat.

  7. Once you file, your name will appear in court records and probably in the papers.

  8. It will be almost impossible to get a mortgage if you do not have one.

  9. You will lose part of your expensive possessions.

Debt Consolidation vs. Bankruptcy, Which Way Forward?

Debt consolidation is most effective if you can control your spending and pay off all your debts. If you default, the debts may revert to the original creditor agreements. In addition, creditors are not obligated to accept your debt repayment plan. It may also not work in your favor since the period of repayment is fixed and may last several years.

If you have considered debt consolidation as a strategy to manage your debt, you should also consider the possibility of filing for bankruptcy. While paying off your debts through a debt consolidation may take a number of years, your dischargeable debts can be cleared within months by Chapter 7 bankruptcy. While your case must be evaluated on its own unique merits, bankruptcy may benefit you more than debt consolidation.

Find a Bankruptcy Attorney Near Me

Without proper debt handling strategies, your debts can spiral out of control. We have the requisite experience and expertise to analyze your debts and prevent you from making your bad financial situation worse. At Los Angeles Bankruptcy Attorney, we are dedicated to helping you have your dischargeable debt cleared. Call our Los Angeles Bankruptcy Lawyer at 424-285-5525, and we will guide you towards debt relief.