Should I File for Bankruptcy or Debt Relief?

Delinquent debt is on the rise. In Pennsylvania, the average total debt was $65,900, according to the Philadelphia Federal Reserve Bank. For many individuals, it can be hard to overcome debt as it begins to pile up. But, there are plenty of options for experiencing that financial relief that comes from reducing your debt burden. 

The best option to reduce and eliminate debt depends on each individual’s financial situation. While bankruptcy might be the best option for one person, another person might be better off consolidating their debt. Meanwhile, another individual may just have to strategize how they manage their money to reduce their financial burden. 

This guide will help you understand each option available to reduce debt, including filing for chapter 7 or 13 bankruptcy, or assessing alternatives to bankruptcy like debt consolidation and debt settlement. 

Option #1: File for Bankruptcy

There are two ways individuals in Pennsylvania can file for bankruptcy: Chapter 7 and Chapter 13. 

Chapter 7 Bankruptcy

Often called “liquidation bankruptcy”, Chapter 7 seeks a discharge of debts over a short period of time with no repayment plan.  It is possible that non-exempt (ie unprotected) assets are sold by the Chapter 7 trustee to pay creditors. Chapter 7 typically takes three to six months to complete and can eliminate most unsecured debts like credit cards, medical bills, and personal loans. However, those filers that have primarily consumer debts must pass a means test to qualify which compares your income to Pennsylvania’s median income levels for a comparable household size. 

Chapter 13 Bankruptcy

Chapter 13 always allows you to keep your property while repaying at least some of the debt through a three-to-five-year repayment plan. This option works well if you have regular income.  Sometimes it is used to allow for a catch up on secured debts like mortgage or car payments. It may help you save your home from foreclosure or prevent vehicle repossession.  It is also used to repay troubling tax debts.  In some cases, its simply used to repay some or all credit card debt.   

Option #2: Debt Consolidation

Debt consolidation combines multiple debts into a single loan, ideally with a lower interest rate. This simplifies your monthly payments and can reduce the total interest you pay over time.

Common consolidation methods include taking out a personal loan, using a balance transfer credit card with a low or zero percent introductory rate, or securing a home equity loan. The goal is to replace high-interest debt with a more manageable payment structure.

Debt consolidation works best for individuals with good credit scores and high income who can qualify for favorable interest rates. It doesn’t reduce the principal amount you owe, but it can make debt more manageable and help you pay it off faster. You pay it off in full, with interest charges on top.  However, you must avoid accumulating new debt while paying off the consolidated loan, or you’ll find yourself in an even worse financial position.  It can take many years of large payments to be successful.  

Option #3: Debt Management

A debt management plan is a structured repayment program typically administered by a nonprofit credit counseling agency. The counselor negotiates with your creditors to reduce interest rates and waive certain fees, then establishes a single monthly payment that you make to the agency, which distributes funds to your creditors.

Debt management plans usually last three to five years and require you to close your credit card accounts enrolled in the program. This option doesn’t reduce your principal balance, but lower interest rates and eliminated fees can significantly decrease what you pay overall.

Debt management is ideal for individuals who have steady income and can commit to regular monthly payments but are struggling with high interest rates. Unlike bankruptcy, a debt management plan doesn’t appear on your credit report as negatively, though creditors may note that you’re repaying through a management plan.  There are fees paid to the debt management company.  The plan can require multiple years of repayment without any mistakes.  

Option #4: Debt Settlement

Debt settlement involves negotiating with creditors to pay less than the full amount you owe. You or a debt settlement company contact your creditors and offer a lump sum payment – typically 40-60% of the debt – in exchange for forgiveness of the remaining balance.

While debt settlement can significantly reduce what you owe, it comes with serious risks. During negotiations, you typically stop making payments, which severely damages your credit score and may result in collection calls or lawsuits. Additionally, forgiven debt may be considered taxable income by the IRS as 1099-C income.  Some creditors may not agree to a settlement and you may be sued in court.  

Debt settlement companies often charge substantial fees. This option should generally be considered only when bankruptcy seems like the only alternative, and you have access to a lump sum of money to make settlement offers.

Which Option Is Best for My Financial Situation?

Choosing between bankruptcy and debt relief alternatives depends on your income, total debt amount, asset ownership, and long-term financial goals. If you’re facing foreclosure or repossession, bankruptcy provides immediate protection through an automatic stay.  Furthermore, there are times when a bankruptcy case would immediately discharge all debt or require repayment of less than 10% of the debt, whereas all other options require repayment of 60% or more of the debt. Before making any decision, consider consulting with a qualified bankruptcy attorney who can evaluate your specific circumstances. Bankruptcy is unique to each individual since it reviews income, expenses, assets, and liabilities.  An experienced bankruptcy attorney can analyze the options and provide you a roadmap.