When bills become unmanageable and creditors are after you, the situation can feel desperate, and many seek what they view as the fastest path out. If you’ve considered filing for Chapter 7 bankruptcy, but you’re wondering if debt consolidation is the better choice, it is important to fully understand the pros and cons of each option before making a decision.

In this article, we will discuss the differences and implications of bankruptcy versus debt consolidation in Colorado.

What is Chapter 7 Bankruptcy?

When your debt exceeds your ability to repay, you may consider filing for bankruptcy as a last resort. While being declared bankrupt by a court affords a strong level of legal protection from creditors, there are significant long-term financial consequences to bankruptcy.

Within federal bankruptcy law, there are a few different types of bankruptcy, but for personal bankruptcy matters, individuals are generally choosing between Chapter 7 and Chapter 13 bankruptcy.

In a Chapter 7 bankruptcy, also known as liquidation bankruptcy, some of the individual’s assets are sold to pay off the debt, and the rest of the debt is cleared. This is the most common type of bankruptcy filed.

In a Chapter 13 bankruptcy, also known as reorganization bankruptcy, a court-mandated repayment plan is set up, allowing the individual the opportunity to keep some of their property.

Whereas only individuals or sole proprietors can file for a Chapter 13 bankruptcy in Colorado, individuals and businesses can both file for Chapter 7. While Chapter 7 bankruptcy is a fairly quick process, taking on average 3-to-5 months versus 3-to-5 years in a Chapter 13 bankruptcy, you are not given an opportunity to avoid a foreclosure. To be eligible for Chapter 7 bankruptcy in Colorado, you must pass the means test.

What is the Colorado Chapter 7 Means Test?

If you are not otherwise exempt from the Colorado means test, as described below, then you must calculate your disposable income under California law. This amount is based on your total income from all sources minus allowable deductions based on your household and other factors. The resulting figure is your disposable income. If your disposable income falls below a certain amount, you meet the means test and are eligible to apply for Chapter 7 bankruptcy in Colorado. Factors impacting these calculations are adjusted over time, so it is very important that you work with an experienced bankruptcy attorney to determine whether you meet the means test.

Debt Consolidation as an Alternative to Chapter 7 Bankruptcy

Debt consolidation involves rolling multiple debts together or debts with higher interest rates into one lower-interest loan. The advantage of debt consolidation is that it can make your payments more manageable, but it does not clear any of your existing debt or afford you the same legal protections as bankruptcy.

Specifically, creditors can still call you, file lawsuits against you, apply legal fees, and your credit score with be negatively impacted. On the other hand, bankruptcy does not have a negative impact on your credit score and will completely clear your debt.

A Trusted Bankruptcy Attorney by Your Side

If you are facing overwhelming debt and unmanageable payments, before you decide to apply for debt consolidation or bankruptcy it is important to speak with a knowledgeable and experienced bankruptcy attorney about your situation.

First, it is important to know whether you even qualify to file for bankruptcy and understand all of the implications of that decision.

For more information, contact our team of trusted and knowledgeable bankruptcy attorneys today at 303-444-6142.