Chapter 7 Vs. Debt Consolidation

Chapter 7 bankruptcy or debt consolidation may ease your debt burden.

Chapter 7 bankruptcy or debt consolidation may ease your debt burden.

Credit is a valuable tool, but only if it's used properly. Unfortunately, many people fall into a debt trap -- and bankruptcy and debt consolidation are two common ways to get out. Neither of these choices will magically erase all of your debt -- you will still be responsible to repay some or all of it. Chapter 7 bankruptcy can eliminate some unsecured forms of consumer debt, while debt consolidation adjusts your payments and interest rates to make your debts more manageable.

Chapter 7

Chapter 7 bankruptcy is a legal process that reaches a settlement with your creditors to eliminate certain debts. Not everyone can file for Chapter 7 because there are income restrictions for eligibility. If your average income is less than the median income for your area and family size you typically qualify. If it is greater, a more detailed assessment of your finances is done to determine eligibility. Certain debts, such as consumer debt and most medical bills are covered; others, such as tax debt and student loan, are not. In Chapter 7, you may need to sell some possessions to repay your creditors. Depending on how much they're worth and how much you own, you may be allowed to keep your primary residence and vehicle.


Chapter 7 bankruptcy can be a long process because of the legalities it involves. Once you file and are approved for bankruptcy, it becomes public record. The bankruptcy will remain on your credit report for at least 10 years. Additionally, it has a severe impact on your credit score. After you file for Chapter 7 bankruptcy, you cannot file again for at least eight years. Bankruptcy is often viewed as a last resort because its long term effects are drastic and can hinder your ability to obtain new credit, buy a house or even find a job.

Debt Consolidation

With debt consolidation you use a new loan to pay off all the existing debts, and then you have only one monthly payment to worry about. Sometimes consolidation can provide lower interest rates, in turn lowering your monthly payments. You can consolidate on your own by applying for loans or using balance-transfer offers from credit cards. Also, debt consolidation services are available through credit counseling companies. These companies work with your creditors to lower interest rates or payments. You pay the counseling service each month rather than your creditors. There is usually a fee to use such services.

Additional Information

Although there is no actual limit to how much debt you can consolidate, you need to be able to make the payments these programs. You need to be in a somewhat better financial situation than if you're considering filing Chapter 7 bankruptcy. It's important to analyze the terms of the various options available. For example, using a zero-balance transfer offer is good for the promotional period of time, but you have to consider how high the rate will jump after the period ends. If you choose to find a credit counselor, look for one associated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. This will help ensure you are dealing with a legitimate credit counselor and not a scammer.

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