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Should I File For Bankruptcy or Try Debt Relief?

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In a Nutshell

When a person can't pay their debts, creditors can become extremely demanding in their attempts to collect debts. In some cases, debt collectors may harass individuals for payment of debts. However, if you do not have any money left over each month to pay your bills, you cannot manage to pay the debt regardless of what a debt collector tells you.

Written by Attorney Jonathan Petts.  
Updated November 26, 2021

Many people struggle with debts they can’t pay each day. For some, debt relief seems impossible. They can’t afford to hire a bankruptcy attorney, pay their debts, get a debt consolidation loan, or pursue other debt relief options.

We understand how frustrating and frightening it can be when you find yourself with too much debt and no solution in sight. The phone calls from credit card companies and their collection agencies never stop, your credit score and with it your creditworthiness is quickly heading in the wrong direction, and your savings account has become nothing but a placeholder reminding you of better days. Add a fear of falling victim to one of the many national debt relief scams that are out there, and it's no wonder you're worried about how to get your personal finances back on track.

Why People Choose Between Debt Relief and Bankruptcy

When a person can’t pay their debts, creditors can become extremely demanding in their attempts to collect debts. In some cases, debt collectors may harass individuals for payment of debts. Of course, if you don't have enough income to make all of your monthly payments then what the debt collector that is calling you may suggest, your financial situation may simply make a payment plan to get back on track impossible.

Some debt collectors and creditors may push you toward a specific debt relief option. Keep in mind, though, that their recommended debt relief option may not be in your best interest (especially if it deals with only a small part of your total debt), but it could be in the best interest of the creditor.

Before you decide to use any debt relief program, you need to carefully review all of your options to get out of debt. Some debt settlement programs could cause you to get into additional debt problems if you are not careful.

You should only make a decision about how to get out of debt after weighing the pros and cons of each debt relief option.

Chapter 7 Bankruptcy vs. Other Debt Relief Options

Both Chapter 7 and other debt relief options as credit counseling, debt settlement companies, or debt settlement services have pros and cons that you need to consider. For some individuals, filing Chapter 7 may be the best way to get rid of debt. However, there may be situations in which another kind of debt management plan might provide the same or better benefits.

There are many different types of debt relief. Many people base their decisions on how bad their situation is and if they think they can climb out of it. If you think debt relief is the right decision for you, it’s important to choose the option that sets the most achievable goals, so you can get debt free.

Let’s compare a Chapter 7 bankruptcy case to other debt relief options to help you decide if filing Chapter 7 bankruptcy is a better option compared to other kinds of debt settlement plans.

Debt Consolidation Loans

A debt collector may urge you to apply for a debt consolidation loan to catch up your bills or repay old debts. A debt consolidation loan is a loan that covers all of the debts you owe so you only have one monthly payment going forward. For many people all they need is to be able to focus on one bill.

Even though it might make your payments more manageable, a debt consolidation loan may not solve your debt problem. For many individuals, a debt consolidation loan places their property at risk and simply shifts debts they can’t afford to pay to another type of debt they can't afford to pay. 

After all, if making the minimum payments is a financial hardship before you enter into a debt settlement program, making a minimum payment on a debt consolidation loan only helps if the total amount you're paying per month is less than all of your minimum payments combined. Without first reducing your total debt amount or getting a lower interest rate, a debt consolidation loan may not move the needle at all when it comes to making your minimum payments.

Most lenders require that you use your property as collateral to obtain a debt consolidation loan. This means that your creditor can take the property that you pledge if you miss a payment, either through repossession or foreclosure. Popular debt consolidation loans involve using a car or a home to secure the loan.

If you can't pay your unsecured creditors, those creditors may only have one recourse — filing a debt collection lawsuit. If you can't afford the payment on the debt consolidation loan, you could lose your home, your vehicles, or other assets you pledged as collateral for it. A Chapter 7 bankruptcy case can get rid of a debt collection lawsuit.

Debt Management Plan / Debt Consolidation Companies

Instead of applying for a debt consolidation loan, some people hire a debt consolidation company. The debt consolidation company promises to negotiate with your creditors to lower your payments as part of a debt management plan. However, many of these credit counseling companies do not tell you several important things about their services.

  • Some debt consolidation companies are expensive. A majority of your monthly payment may go to the debt consolidation company instead of your creditors. Sometimes the payments are structured in a way that you pay the debt relief company's upfront fees first, while your credit report gets hit with a missed payment notification every month. This drives down your credit score even while you're trying to settle your debts.

  • Your creditors are not legally required to work with the company. Some creditors may refuse to negotiate a payment arrangement.

  • Creditors can cancel the agreement at any time. Sometimes creditors change their minds and decide to pursue other legal remedies to collect the debt, even if you are current on your payments to the debt consolidation company.

  • “Lowering” your payments often means more time in debt. By extending the term to repay the debt, you are paying more money in interest to the creditors, and it takes you much longer to get out of debt.

Debt Settlement with Lump Sum Payments

Another popular debt relief option is to negotiate with your creditors to accept a lump sum payment to satisfy the debt. You offer to pay a percentage of the debt instead of paying the debt in full. The creditor agrees to cancel the debt for an amount that is less than the total amount owed on the account.

Debt negotiations may appear to be a good idea. You can get out of debt for less than you owe to your creditors. However, there are some drawbacks to debt negotiations. Potential drawbacks include:

  • You must have a large sum of money available to pay the debts once the creditor agrees to the payment. Many people don’t have access to large sums of money without using their home or other assets as collateral.

  • You Might Put Your Property at Risk. As with a debt consolidation loan, you often transfer unsecured debts to secured debts. So, you’re risking your home if you can’t afford to pay the loan.

  • Your creditors are not required to negotiate the debt. Some creditors might demand full payment, or they will pursue legal action.

  • You Can Still Get Sued. As with the debt consolidation company, you could do a lot of work and pay a lot of money only to have one or more creditors sue you for the full amount owed on the account.

  • It Might Increase Your Taxes. Negotiating your debt may increase your tax liability next year. When a creditor writes off bad debt, the creditor reports the debt to the IRS and sends you a 1099 form. You are required to report the debt as “income” on your tax return. Reporting the debt on your tax return could increase the amount of taxes you will owe next year.

Is Chapter 7 Better Than Other Debt Relief Options?

We mentioned a couple of ways that Chapter 7 would be better than other debt relief options  above. Even though some people consider bankruptcy more of a last resort, you should not think of it that way. Ways that filing Chapter 7 may be the best debt relief option for you include:

  • Usually takes less than 6 months. Chapter 7 can eliminate most of your debts within four to six months without any payments to the creditors.

  • Creditors must obey bankruptcy laws. The creditor can’t continue collection efforts after you file your Chapter 7 petition without court approval. This means all the phone calls have to stop!

  • Stop collections and harassment. Creditors are not permitted to collect discharged debts. A creditor may face severe penalties for violating the discharge order.

  • Stops wage garnishment. A Chapter 7 bankruptcy case stops wage garnishment, debt collection lawsuits, and other forms of debt collection.

  • Erases deficiency judgments. If you choose to surrender your car or house because you can't afford the payments, a creditor can't obtain a deficiency judgment. (If you already have a deficiency judgment against you, the Chapter 7 case discharges the debt.)

  • Doesn’t have to be expensive. Your costs for filing a Chapter 7 case may be very low if you’re eligible to use Upsolve’s free bankruptcy filing tool and file bankruptcy without a lawyer.

What is a Chapter 7 Bankruptcy?

Chapter 7 of the Bankruptcy Code is referred to as the “liquidation” chapter of bankruptcy because a Chapter 7 trustee can sell some property to pay debts. Instead of proposing a bankruptcy repayment plan as required in Chapter 13 bankruptcy, the filer surrenders any property that can’t be protected by the bankruptcy exemptions to the bankruptcy estate.

However, federal bankruptcy exemptions or state bankruptcy exemptions protect most of your day-to-day property. Exempt property can’t be used to pay your creditors. That’s why most Chapter 7 cases filed in the United States are no-asset Chapter 7 cases.[1] In a no-asset case, the debtor keeps all his or her property while getting a fresh start by becoming debt-free. No-asset cases that don’t require a full means test analysis can be done on your own through a free bankruptcy nonprofit, Upsolve, or with the help of a legal aid attorney.

What Debts Are Discharged in Chapter 7?

A majority of unsecured debts are eligible for a discharge under Chapter 7. Examples of unsecured debts that you can discharge in a Chapter 7 case include:

  • Credit card debts

  • Personal loans

  • Medical bills and expenses

  • Personal judgments

  • Some old income tax debt

  • Old utility, rent, and lease payments

However, some unsecured debts are not eligible for a discharge. Most income taxes are not dischargeable. You can only discharge income taxes that meet very specific requirements. In addition, most student loans are not eligible for a discharge unless the debtor qualifies for a hardship discharge of the student loans.

Also, alimony and child support are not dischargeable. You can’t get out of paying your domestic support payments by filing a Chapter 7 bankruptcy case.

What Happens To Secured Debts?

Creditors who have collateral to secure their debts are referred to as secured creditors. You must continue to pay secured debts to keep the property. Therefore, if you want to keep your home or car, you must pay the loan payments even though you file a Chapter 7 case. However, if you want to surrender the collateral, you can do so without fear of a deficiency judgment.

I Want to File Chapter 7, But I Can’t Afford to Pay a Chapter 7 Bankruptcy Attorney

Bankruptcy attorneys help people file for bankruptcy relief to get out of debt. Unfortunately, some people can’t afford to pay the average cost to hire a Chapter 7 attorney. For those individuals, there may seem like there is no hope to get out of debt through bankruptcy.

Bankruptcy laws don’t require a person to hire a lawyer to file a bankruptcy case. So, even though you may not be able to afford a Chapter 7 attorney, you may still be able to file Chapter 7 to get out of debt quickly.

You Can File Chapter 7 Bankruptcy Without an Attorney!

Upsolve developed a free filing tool that will empower you to complete your bankruptcy forms without the help of a bankruptcy lawyer. Watch videos of people who have used our services in the past to file a Chapter 7 case.

We make the process of filing a Chapter 7 case as easy for you as possible. Our unique bankruptcy software guides you through the process of qualifying for Chapter 7, completing your Chapter 7 forms, and filing your Chapter 7 case with the Bankruptcy Court.

You don’t need to struggle with debts for another day without help. You can charge and deal with your overwhelming debt by filing bankruptcy without a lawyer

Choosing a Debt Relief Option That is Right for You

As we discussed above, there are several debt options that you can explore, including filing a Chapter 7 bankruptcy case, consolidating your debts by borrowing money, using a debt consolidation company, or negotiating a one-time lump sum payment. It's always a good idea to check in with the Better Business Bureau before making any final decision on how to reach the freedom debt relief provides.

You can find more information in our Learning Center. If you meet the income requirements, a Chapter 7 case may be the best way for you to get out of debt. If you’re still unsure, schedule a free consultation with a bankruptcy lawyer in your area. They can give you legal advice on which debt relief option best suits your financial situation. 


  1. American Bankruptcy Institute. (2002). Bankruptcy by the Numbers - Chapter 7 Asset Cases. ABI Journal. Retrieved August 4, 2020, from https://www.abi.org/abi-journal/chapter-7-asset-cases

Written By:

Attorney Jonathan Petts


Jonathan Petts has over 10 years of experience in bankruptcy and is co-founder and Board Chair of Upsolve. Attorney Petts has an LLM in Bankruptcy from St. John's University, clerked for two federal bankruptcy judges, and worked at two top New York City law firms specializing in... read more about Attorney Jonathan Petts

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