| Debt settlement | Chapter 7 bankruptcy | |
|---|---|---|
| What you pay | Typically 40–60% of balances plus 15–25% fees | $338 court fee plus attorney fees; often nothing to creditors |
| How long | About 2–4 years | About 4–6 months |
| Stops lawsuits and garnishment? | No. Creditors can sue while you save. | Yes, the automatic stay stops most collection right away |
| Taxes on forgiven debt | Possible (Form 1099-C) | Debt discharged in bankruptcy isn't taxable income |
| Credit report | Settled accounts up to 7 years from delinquency | Up to 10 years from filing (7 for Chapter 13) |
| Public record | No | Yes, court filing |
| Can you choose which debts? | Yes, enroll some and keep others | Generally all debts must be listed |
When settlement tends to fit better
- You have some income to save each month and want to avoid a court filing.
- You don't pass the Chapter 7 means test and don't want a 3–5 year Chapter 13 plan.
- You have assets that bankruptcy exemptions wouldn't protect.
When bankruptcy tends to fit better
- You're already being sued, garnished, or facing foreclosure.
- You couldn't afford monthly settlement deposits for years.
- The tax bill from settled debt would be more than you could pay.
- Your debts are large compared with your income and assets.
Get both opinions. Many bankruptcy attorneys offer a free consultation, and that's the best way to know whether Chapter 7 or 13 would beat a settlement quote. Bring the settlement company's written fee schedule.
Read the full guides: debt settlement and bankruptcy. Sources: U.S. Courts, IRS Topic 431.