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Compare debt settlement vs. bankruptcy

There is a way out of overwhelming debt — but you'll still face some major drawbacks.

Debts settlement and bankruptcy are sometimes discussed as giant “delete buttons” for your debt. While they can both be helpful tools to ease the tension in your finances, neither are free — you’ll have to pay for each service. It’s not a fast process, either: You may spend months or even years paying back what you owe.

However, when you’re looking to tackle your debt once and for all, debt settlement and bankruptcy both offer the opportunity for you to rebuild your personal finances — and your life.

5 ways to compare debt settlement and bankruptcy

Debt settlementBankruptcy
Approximate costAround 20% of your total debt.Varies, but usually at least $1,800. Typically have to pay a base fee of $200 per month that you are bankrupt. In addition, you will need to pay a portion of any surplus income you receive.
Affect on creditStays on credit report for up to 7 years, temporarily lowers score.Stays on credit report for 6 years for first offence and 14 years for second.
Length of process2 to 5 years.9 months, however could be extended.
Qualifying debtUsually $15,000 or more, however varies.Must have lived or done business in Canada in the last year and be insolvent. Insolvent means to owe $1,000 or more. You must also have debt that is greater than the sale value of your qualifying assets.
Can I keep my assets?Yes.No, you will lose most.

What’s the difference between debt settlement and bankruptcy?

When you’re unable to pay off your creditors, both options can dig you out of a hole and allow you to start over again — for a price.

The biggest difference? Bankruptcy lawyers are required to prioritize your interests and protect you against unnecessary penalties, while debt settlement companies are not.

Debt settlement

Debt settlement companies negotiate with your creditors to lower the amount you owe in exchange for payment in one fixed lump sum. This option is generally only available for people with a lot of unsecured debt — debt that isn’t backed by collateral.

Once you enroll your debt in a debt settlement program, you start depositing monthly payments into a trust account with the company. This money is used by the company to cover the cost of settlement and the fee for using its services.

However, debt settlement isn’t guaranteed to work. Some creditors refuse to settle debt, and if you stopped making payments on your debt in anticipation of negotiating it down, you could find yourself owing that creditor more than you started with.


Generally, bankruptcy is a legal process that involves filing a petition to a court. With this petition, you state that you’re unable to repay your debts.

With bankruptcy, you will need to prove that you’re insolvent, meaning you owe $1,000 or more and have an inability to pay back what you owe.

If the courts approve it, declaring bankruptcy essentially wipes the slate clean, but it also exposes you to losing your important assets, including your home and vehicle.

Which costs more?

Debt settlement can cost more than bankruptcy, but it ultimately depends on how much debt you have.

Debt settlement companies typically charge a fee that’s around 20% of your enrolled debt. You might also need to pay taxes on any settled debt, and your debts will continue to accrue interest and late fees while you’re enrolled in a debt settlement program. In the end, you might only save around 10% of what you owe, once you pay for the costs.

When you file for bankruptcy, you might be able to get away with paying as little as $1,800, which will cover the $200 monthly base fee that is usually charged for nine months. This cost is the absolute minimum you will pay since the courts can extend your bankruptcy claim longer than nine months and can tack on additional fees. For example, if you earn a surplus of income, you will need to pay a portion of it toward your bankruptcy.

Which damages your credit more?

In most cases, filing for bankruptcy will damage your score much more than debt settlement.

  • Debt settlement will usually stay on your credit report for six or seven years — depending on the credit bureau.
  • A bankruptcy will stay on your report for six to 14 years — depending on the number of times you claim bankruptcy.

Although the damage on your credit report is quite similar between the two, you won’t face as many borrowing restrictions during that time period if you choose debt settlement. Bankruptcy, on the other hand, may completely limit your borrowing options for the foreseeable future.

However, the danger is when debt settlement isn’t successful. If you’ve stopped making payments on your debt in anticipation of a successful settlement, you risk defaulting on your debts if the debt settlement doesn’t work. You’ll damage your credit report and might be left with no alternative other than claiming bankruptcy. Of course, you can continue paying your creditors throughout the settlement process, but most people don’t due to the expense.

Look out for debt settlement scams.

Keep an eye out for several warning signs of a debt settlement company that’s not legit. Any company that guarantees it can settle your debt, guarantees it can get you a specific amount of debt settled, asks for upfront fees or says it can get your creditors to agree to settlement should raise red flags.

Learn more about how to find a legit debt relief company here or compare legit companies in the table below.

Compare legitimate debt relief companies

1 - 1 of 1
Name Product Costs Requirements
Varies (depends on the company you're connected with)
Have at least $10,000 in unsecured debt and a hardship that is preventing you from paying your creditors
A nationwide service that can help you find a solution to reduce your debt payments by up to 50%. Request a free consultation with a trained debt relief specialist.

Compare up to 4 providers

Which is easier to qualify for?

Debt settlement typically comes with fewer qualification requirements.

Bankruptcy is often seen as the absolute last resort when it comes to dealing with debt, so it tends to be harder to qualify for than debt settlement.

Not only must you owe more than $1,000, you must have debts greater than the sale value of your assets. This means your debts must be greater than any assets you own, such as a home, jewelry, land, artwork, car, boat, RV or any other valuable asset.

Which has a higher success rate?

Bankruptcy has a far higher rate of success.

Mostly everyone that qualifies and files for bankruptcy will likely have their debts discharged, especially those who file with a lawyer.

Debt settlement has a much lower success rate, since not all creditors are wiling to settle.

Bottom line

Debt settlement and bankruptcy are difficult options that you should weigh carefully. Debt settlement comes with the highest risk — it has a much lower success rate — and can be a lot more expensive than you might expect.

While declaring bankruptcy is faster and usually has a much higher success rate than debt settlement, it’s also more difficult to qualify for and you could lose your assets.

Each option can significantly damage your credit and make it difficult for you to purchase assets, get financing in the future and even find employment. Before you pursue either option, first make sure you can’t use other means to decrease your debt.

Frequently asked questions

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