Can I File Bankruptcy if I’m in a Debt Relief Program?

Can I File Bankruptcy if I’m in a Debt Relief Program?

Yes, you can file for bankruptcy even if you are in a debt relief program.

When you're struggling with debt, it can be overwhelming to know the right steps on the path to becoming debt free. Many people start with debt relief programs like debt management plans or debt settlement, hoping these will help them regain control. But sometimes, these efforts might not be enough. 

If you still find yourself drowning in debt despite these attempts, it might be time to consider filing bankruptcy. Bankruptcy can offer a fresh start by wiping out your remaining debts and stopping collection actions, providing the relief you need to move forward.

If you decide to switch from a debt relief plan to Chapter 7 bankruptcy, there are a few things to know. One important thing is whether you’ve made any payments over $600 to your creditors in the last 90 days. These are called preferential payments, and the bankruptcy trustee will flag them. The trustee can take back these payments to share the money fairly among all your creditors. This won’t stop your case from being successful, but it can cause some delays.

Three common debt relief programs are debt consolidation, debt settlement, and debt management plans. Let’s take a look at how each of these may impact your bankruptcy filing.

Can I File Bankruptcy if I’ve Consolidated My Debts?

It's perfectly fine to file for bankruptcy after trying debt consolidation if your financial situation changes and you can no longer make the payments. But experts advise waiting for at least 90 days to file your bankruptcy case after getting a debt consolidation loan.

Here’s why: When you consolidate your debt, you use a new loan to repay existing debt accounts. Then those accounts are closed, and you can focus on repaying the single loan, hopefully at a lower interest rate. 

If you don’t wait at least 90 days after getting the consolidation loan, the bank that issued your loan may object to the discharge of your debt. They can argue that they wouldn't have given you the loan if they knew you were about to file a bankruptcy petition. 

Be aware that knowingly and intentionally taking on new debt before filing for bankruptcy can be seen as bankruptcy fraud. If you're looking at ways to handle your debt that involve taking on more debt (for non-essential items), make sure that plan will really work for you. If not, consider your bankruptcy options instead.

Can I File Bankruptcy if I’ve Been Trying Debt Settlement? 

You can file bankruptcy if you’re trying debt settlement, whether or not your negotiations have been successful.

The same concern about potential preferential payments applies here as it does with other debt relief options. If you paid a lender or debt collector more than $600 in the 90 days before you file your bankruptcy case, the bankruptcy trustee may consider this a preferential payment. Again, this won’t stop you from getting your debts discharged through bankruptcy, but it can delay the timeline or cause some complications.

If you aren’t sure how your debt settlement efforts will impact your bankruptcy filing, you can set up a free consultation with a bankruptcy attorney to get some answers.

Can I File Bankruptcy if I’m in a Debt Management Plan?

Yes, you can file for bankruptcy even if you’re in a debt management plan (DMP). A credit counselor may have suggested a DMP to help you avoid filing for bankruptcy, but if you can’t afford the payments, you can file for bankruptcy instead. 

Again, if you paid a single creditor more than $600 in the 90 days before filing, the trustee might recover those funds. But your obligation to pay the debts will be discharged. Once you file for bankruptcy, you won’t have to make your monthly DMP payments anymore.

What’s Better: Bankruptcy or Debt Relief?

Each person has to answer this question for themselves, but you can get support in doing so! 

Here’s where you can start: If you have a low income, you’ve tried paying down debt but haven’t been successful, and you have more debt than you can handle, Chapter 7 bankruptcy might be a good choice for you. It's especially helpful if you need quick relief from creditors or if your debt is causing you serious anxiety. 

But if you feel like you just haven’t landed on the right debt repayment strategy yet, you might want to explore other options like debt settlement, debt consolidation, or a debt management plan.

You’ll also want to consider:

• Debt: How much debt do you have? What kind of debt do you have?

• Cost: How much will each option cost you? Is it DIY, or do you need to hire some help?

• Timeline: How long will each option take you, and are you confident you can stick with the timeline?

• Flexibility: How much flexibility do you need in your repayment strategy?

• Credit score: How much does your credit score matter to you right now? Can you reach your financial goals if you choose this form of debt relief?

• Potential negative consequences: Are you worried you might get sued or face wage garnishment if you don’t pay to get rid of your debt soon? Are you stressed about current collection efforts?

Frequently Asked Questions About Bankruptcy and Debt Relief

For even more information about bankruptcy and debt relief, you can visit Upsolve’s Learning Center. 

What’s the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

There are many types of bankruptcy, but the most common types of personal bankruptcy are Chapter 7 and Chapter 13.

Here are the biggest differences between the two:

Eligibility

• To be eligible for Chapter 7, you need to pass the means test, which is based on your income and expenses.

• To be eligible for Chapter 13, you’ll need to have a regular income, and your combined debts (unsecured and secured) must be under $2.75 million. 

Process & Fees

• Chapter 7 is a relatively quick process, where most unsecured debts are discharged within 3–6 months. There is a filing fee, but you can request a fee waiver from the court. You can hire a bankruptcy attorney to help you, or you can represent yourself. If you have a simple Chapter 7 case, you may be eligible to use Upsolve’s free filing tool.

• Chapter 13 involves creating a 3–5-year repayment plan where you pay a portion of your debts from your income. Success rates for Chapter 13 filers are much higher with a bankruptcy lawyer, though attorney fees can be higher for Chapter 13 since it’s longer and more complicated. There’s also a court filing fee.

Impact on Assets

• Exemptions outlined in bankruptcy law protect most Chapter 7 filers from losing any personal property. However, you may hear Chapter 7 referred to as liquidation bankruptcy because if you have assets or property that’s not protected by exemptions, you risk losing it during bankruptcy.

• Chapter 13 allows you to keep all property while repaying debts according to the required payment plan. 

How Do I Choose Between Bankruptcy and Debt Relief Based on the Type of Debt I Have?

The are two basic categories of debts: 

• Secured debts, which are debts that are backed by collateral. The two most common types of secured debts are mortgages (where the home is the collateral) and auto loans (where the car is the collateral). If you fall behind on repaying these loans, you may face foreclosure or repossession.

• Unsecured debts, which are debts that aren’t backed by collateral. The most common unsecured debts are credit card debt, medical bills, personal loans, and payday loans. If you don’t pay unsecured debt, you’ll likely face debt collection efforts that can range from phone calls to a debt lawsuit or wage garnishment.

Most of the common debt relief programs are designed to deal with unsecured debts. If you have only or mostly unsecured debts, you may be a good candidate for a debt settlement plan, debt consolidation, a debt management plan, or bankruptcy. If you want some help deciding which is best for you, consider setting up a free consultation with a nonprofit credit counseling agency.

Secured debts are a little trickier. If you’ve hit a rough patch and missed payments on a car or home loan, your best first option is usually to contact the lender directly. They may have a hardship program that allows you to skip a payment or reduce your payments. You can also look into refinancing your debt. If you have secured debts and you’re thinking about bankruptcy, you’ll want to educate yourself on bankruptcy basics and the difference between Chapter 7 and Chapter 13 bankruptcy.

What if I Have Court-Ordered Child Support or Alimony Payments or Student Loans?

There’s one other category of debt that’s relevant if you’re filing bankruptcy. That’s called priority debt, and it includes things like child support and alimony. These can’t typically be discharged in bankruptcy. Student loans are also treated differently than other kinds of debt in bankruptcy. 

How Do I Choose Between Bankruptcy and Debt Relief Based on the Amount of Debt I Have?

You can access most debt relief options regardless of how little or how much debt you have. There is no minimum or maximum total debt amount for Chapter 7 bankruptcy, debt settlement, debt consolidation, or a debt management plan. Debt is an important factor in figuring out your best debt relief option, but you’ll also want to consider your income, your repayment plan timeline, and what an affordable monthly payment would be (if you’ll have one).

However, Chapter 13 bankruptcy does have debt limits to qualify: As of 2024, your combined unsecured debts and secured debts must be less than $2.75 million.

How Do Different Debt Relief Options Affect My Credit Report?

Different debt relief options can affect your credit in various ways. Here's a summary of how each option might impact your credit:

Chapter 7 Bankruptcy

• Can significantly lower your credit score in the short term, especially if your score is high when you file

• Remains on your credit report for 10 years from the filing date, but impact to your score decreases over time

• Filers can rebuild their credit quickly with effort

Chapter 13 Bankruptcy

• May lower your credit score, but typically less than Chapter 7

• Stays on your credit report for seven years from the filing date

• Involves a repayment plan, which may be seen more favorably by future lenders since you’re repaying some of your debts

Debt Settlement

• Can lower your credit score if the lender reports the account as settled instead of paid in full

• Stays on your credit report for seven years from the date of settlement

Debt Consolidation

• Might initially lower your credit score (due to credit check, opening a new account, and potentially closing older accounts)

• If managed well, can improve your score if you make timely payments

Debt Management Plan (DMP)

• May lower your credit score initially, as accounts are closed and noted in your report

• As you make consistent payments, it can improve your score over time

It’s helpful to know what goes into your credit score, so you can understand how different actions might impact your credit.

Let’s Summarize…

Yes, you can absolutely file for bankruptcy relief even after attempting to work things out through an alternative debt relief program. Once your bankruptcy case is filed, you can stop making the payments under the debt relief plan you’re in (if you haven’t already) and your obligation to pay the debt will be eliminated for good when your discharge is entered. 

If you have a simple Chapter 7 case, you take our quick two-minute screener to see if you qualify to use Upsolve’s free filing tool.