File Bankruptcy While in Debt Relief Program? Yes

You can file bankruptcy even if you’re currently enrolled in a debt relief program. Many people try debt management plans or debt settlement before considering bankruptcy. Sometimes these programs work. Other times, they don’t provide enough relief.

Once you file your bankruptcy case, you can stop making payments to your debt relief program. After the bankruptcy court grants your discharge, you won’t owe those debts anymore.

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If your debt management plan or settlement program isn't working, bankruptcy might eliminate your debts in months instead of years. Find out if you qualify for Chapter 7 discharge now.

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Bankruptcy might be your best path forward. You deserve a fresh financial start.

Filing Bankruptcy After Trying Debt Relief Programs

Switching from a debt relief plan to Chapter 7 bankruptcy is completely legal. You just need to know about one potential issue: preferential payments.

Have you paid more than $600 to any single creditor in the last 90 days? The bankruptcy trustee will flag these as preferential payments. The trustee can recover this money to distribute fairly among all your creditors.

Preferential payments won’t stop your bankruptcy case. They may cause minor delays. Your debts will still be discharged.

Three common debt relief programs are debt consolidation, debt settlement, and debt management plans. Each one affects your bankruptcy filing differently.

Bankruptcy After Debt Consolidation

You can file bankruptcy after consolidating your debts. Experts recommend waiting at least 90 days after getting a consolidation loan before filing.

Debt consolidation works by using a new loan to pay off existing debts. You close old accounts and focus on one monthly payment, hopefully at lower interest.

Why wait 90 days? The bank that issued your consolidation loan may object to your discharge. They could argue they wouldn’t have approved the loan if they knew you planned to file bankruptcy soon.

Taking on new debt right before bankruptcy can look like fraud. Make sure any debt relief plan will actually work for your situation. If you’re not confident, speak with a bankruptcy attorney for free.

Bankruptcy After Debt Settlement

You can file bankruptcy while attempting debt settlement. Your negotiations don’t need to be complete or successful.

The same preferential payment rule applies here. Payments over $600 to a single creditor within 90 days may be recovered by the trustee.

Again, this won’t prevent your debt discharge. You might experience some delays or complications. The outcome remains the same: your debts get eliminated.

Bankruptcy While in a Debt Management Plan

You can absolutely file bankruptcy while enrolled in a debt management plan. Credit counselors often suggest DMPs as bankruptcy alternatives. But if you can’t afford the payments, bankruptcy might be your better option.

The trustee might recover payments over $600 made in the 90 days before filing. Your obligation to repay those debts will still be discharged.

Once you file bankruptcy, you stop making DMP payments immediately. Your monthly financial burden ends right away.

Choosing Between Bankruptcy and Debt Relief

Only you can decide which option works best for your situation. You don’t have to decide alone.

Chapter 7 bankruptcy might be right for you if:

You have low income
You’ve tried paying down debt without success
Your debt exceeds what you can reasonably repay
You need immediate relief from creditor harassment
Debt is causing serious stress or anxiety

Other debt relief options might work if you just haven’t found the right repayment strategy yet. Consider these factors:

Debt amount and type: How much do you owe? What kinds of debts do you have?
Cost: What will each option cost? Can you handle it yourself or do you need professional help?
Timeline: How long will each solution take? Can you commit to that timeframe?
Flexibility: Do you need flexibility in your repayment plan?
Credit score impact: How important is your credit score right now?
Legal consequences: Are you at risk of lawsuits or wage garnishment?

Bankruptcy stops collection efforts immediately. It gives you breathing room to rebuild your financial life.

Understanding Chapter 7 vs. Chapter 13

Chapter 7 bankruptcy eliminates most unsecured debts in about four months. You don’t make monthly payments to creditors. The trustee may sell non-exempt assets to pay creditors, but most filers keep their property.

Chapter 13 bankruptcy creates a three-to-five-year repayment plan. You make monthly payments based on your income and expenses. After completing the plan, remaining eligible debts are discharged.

Chapter 7 works best for low-income filers with mostly unsecured debt. Chapter 13 helps people with regular income who want to keep property like homes or cars.

How Debt Type Affects Your Decision

Not all debts can be discharged in bankruptcy. Understanding which debts bankruptcy can eliminate helps you decide if it’s right for you.

Bankruptcy typically discharges:

Credit card debt
Medical bills
Personal loans
Utility bills
Past-due rent

Bankruptcy usually cannot discharge:

Student loans (except in rare hardship cases)
Child support and alimony
Most tax debts
Court fines and restitution
Debts from fraud or intentional harm

If most of your debt can’t be discharged, other debt relief options might work better. A bankruptcy attorney can review your specific debts and advise you.

Credit Score Impact of Different Options

All debt relief options affect your credit score. Understanding the impact helps you make an informed choice.

Chapter 7 bankruptcy stays on your credit report for 10 years. Chapter 13 stays for seven years. Your credit score will drop initially, often by 100-200 points.

But here’s the good news: you can start rebuilding credit immediately after discharge. Many people see their scores improve within 12-24 months.

Debt settlement also damages your credit. Settled accounts show as “settled for less than owed.” You’ll likely miss payments during negotiations, which hurts your score. Settlements stay on your report for seven years.

Debt management plans have minimal credit impact. They appear on your credit report but don’t directly lower your score. Some creditors may close your accounts, which can affect your credit utilization ratio.

Debt consolidation affects your credit minimally if you make on-time payments. The hard inquiry and new account may cause a small temporary drop.

Remember: bad credit from overwhelming debt often damages your score more than bankruptcy does. Speaking with a bankruptcy attorney can help you understand your best path forward.

Frequently Asked Questions

What are preferential payments in bankruptcy?

Preferential payments are payments over $600 made to a single creditor within 90 days before filing bankruptcy. The bankruptcy trustee can recover these payments to distribute the money fairly among all your creditors. These payments won't stop your bankruptcy case but may cause delays.

How long should I wait to file bankruptcy after getting a debt consolidation loan?

You should wait at least 90 days after getting a debt consolidation loan before filing bankruptcy. Filing sooner allows the lender to object to your discharge by arguing they wouldn't have issued the loan if they knew you planned to file bankruptcy immediately.

Can I discharge student loans and child support in bankruptcy?

Generally, no. Student loans can only be discharged in bankruptcy if you prove undue hardship, which is very difficult. Child support and alimony cannot be discharged in bankruptcy at all. However, bankruptcy can discharge other debts, freeing up money to pay these non-dischargeable obligations.

What happens to my debt management plan when I file bankruptcy?

Once you file bankruptcy, you can immediately stop making payments to your debt management plan. The automatic stay prevents creditors from collecting, so continuing the DMP serves no purpose. After your discharge is granted, you'll have no obligation to repay the debts that were included in your bankruptcy.

How does bankruptcy affect my credit compared to debt settlement?

Chapter 7 bankruptcy stays on your credit report for 10 years, while debt settlement stays for seven years. Both damage your credit initially. However, bankruptcy eliminates debts quickly, allowing you to rebuild credit sooner. Many bankruptcy filers see credit score improvements within 12-24 months after discharge.

Can You File Bankruptcy While in a Debt Relief Program?