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Compare debt settlement vs. bankruptcy

Both can help you out of overwhelming debt, but not without side effects.

Debt settlement and bankruptcy are sometimes seen as giant delete buttons for your debt, but the truth is that neither one is fast — or free.

6 ways to compare debt settlement and bankruptcy

Debt settlementChapter 7 bankruptcyChapter 13 bankruptcy
Approximate cost20% of debt + income taxesWithout lawyer: $335
With lawyer: $835 to $3,835
Without lawyer: $310
With lawyer: $1,810 to $6,310
Affect on creditStays on credit report for 7 years, temporarily lowers scoreStays on credit report for 10 years, temporarily lowers scoreStays on credit report for 7 years, temporarily lowers score
Length of process2 to 4 years3 to 6 months3 to 5 years
Qualifying debtAt least $7,500 in unsecured debt — no home, auto or student loansAny debt as long as you pass a “means test”Secured debts of less than $1,184,20; unsecured debts of less than $394,725
Approximate success rate10%95%55%
Can I keep my assets?YesNoYes

What’s the difference between debt settlement and bankruptcy?

Bankruptcy is an established legal process, and your lawyers are required to prioritize your interests and protect you against unnecessary penalties. Debt settlements vary from person to person, and there’s no guarantee that the company you work with will successfully negotiate a payment plan on your behalf.

Debt settlement

Debt settlement companies negotiate with your creditors to lower the amount you owe in exchange for payment in one fixed 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.

But 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.


The most common types of bankruptcies for individuals are Chapter 7 and Chapter 13. 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 Chapter 7 bankruptcy, your goal is a discharge. This is an order from the court that bars any creditor from attempting to collect on outstanding debts. It essentially wipes the slate clean, but it also exposes you to losing your important assets, including your home.

How to file Chapter 7 bankruptcy

Chapter 13 bankruptcy wipes out part of your debt. You have to pay off the rest through a repayment plan, typically over three or five years. Unlike Chapter 7, you can keep your assets.

How to file Chapter 13 bankruptcy

Which costs more?

If you owe less than $5,000, debt settlement can sometimes be the cheapest option — especially if you don’t qualify for Chapter 7. However, the least expensive option will vary from case to case. Grab your calculator and estimate how much you’ll pay for each option before deciding.

  • Debt settlement. Expect to pay 65% to 90% of the total cost of your debt after factoring in fees, taxes and interest, with most people saving on the lower end of the spectrum.
  • Chapter 7 bankruptcy. Expect to pay anywhere from $500 to $3,500 in legal fees, plus a $335 filing fee, which can be waived if your income is 150% below the poverty line
  • Chapter 13 bankruptcy. Expect to pay anywhere from $1,500 to $6,000 in legal fees, plus a $310 filing fee.

Compare debt settlement companies

1 - 3 of 3
Name Product Costs Requirements
Freedom Debt Relief
Monthly payment based on enrolled debt, no upfront fees
Must have at least $7,500 in unsecured debt, have a hardship is preventing the ability to pay creditors, and live in a serviced state.
Freedom Debt Relief works to help people with unmanageable, unsecured debt get back on their feet.
Accredited Debt Relief
Charges and fees vary by the company you're ultimately connected with
Must be at least 18 years old and a legal US resident; additional terms may apply based on services and products used.
This A+ BBB-rated service offers free consultations to lower your monthly payments help you get out of debt faster.
National Debt Relief
15–25% of total enrolled debt
Must have a legitimate financial hardship which is preventing the ability to pay creditors and a minimum of $7,500 in debt.
Get back on your feet with a top-rated company that works with multiple types of debt.

Compare up to 4 providers

Before you sign up with a debt relief company

Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And not all companies are transparent about these costs or drawbacks that can negatively affect your credit score. Depending on the company you work with, you might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.

Consider alternatives before signing up with a debt relief company:

  • Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
  • Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
  • Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.

Which damages your credit more?

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

A Chapter 7 bankruptcy stays on your credit report for 10 years. Chapter 13 stays on for seven. Filing for either type can also lower your credit score by 150 to 200 points.

Successfully settled debts are marked as “settled” on your credit report for seven years, but you won’t face as many restrictions during that time period when it comes to borrowing. And your credit score may take a dip that’s just as bad as filing for bankruptcy.

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 it doesn’t come through. You’ll mar your credit report and might be left with no alternative to bankruptcy. Of course, you can continue paying your creditors throughout the settlement process, but most people don’t due to the expense.

Negotiate a debt settlement by yourself

Look out for debt settlement scams.

In 2010, the US Government Accountability Office published a report uncovering several fraudulent practices by debt settlement companies. The report lead to a government crackdown and the establishment of trade groups like the American Fair Credit Council.

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, asks for upfront fees or advertises a government program that can eliminate your debt for free is bad news.

Tips to find a legit debt relief company

Which is easier to qualify for?

Debt settlement typically comes with fewer qualification requirements.

Anyone with unsecured debt of $7,500 or more can qualify to enroll in most debt settlement companies, though most don’t operate in all 50 states.

In contrast, you have to have less than $1,184,200 in secured debts and $394,725 in unsecured debts to qualify for Chapter 13 bankruptcy. You also have to be employed.

Qualifying for Chapter 7 bankruptcy is much more complicated: You must meet a laundry list of criteria that proves you don’t and won’t have the funds to pay your debts.

To be eligible for any type of bankruptcy, you’re also required to get credit counseling from an approved agency before filing. And you won’t qualify for bankruptcy if you’ve had a past bankruptcy petition dismissed in the past 180 days.

Which has a higher success rate?

Bankruptcy has a far higher rate of success.

Nearly everyone that qualifies and files for Chapter 7 bankruptcy has their debts discharged, especially those who file with a lawyer.

A little more than half of Chapter 13 bankruptcy cases are successful. This lower percentage is due to clients finding themselves unable to stick to their payment plans. It’s sometimes possible to have your Chapter 13 bankruptcy converted into Chapter 7 if you meet the requirements.

Debt settlement had a success rate of about 10% before the government crackdown on fraudulent debt settlement companies. Government-commissioned reports show that little has changed since.

Bottom line

Debt settlement and bankruptcy are difficult options that you should weigh carefully. Debt relief comes with the highest risk — it only has a 10% success rate on average — and can be a lot more expensive than you might expect.

Chapter 7 bankruptcy is faster with a higher success rate than debt settlement, but it’s more difficult to qualify for and you could lose your assets. Chapter 13 bankruptcy can take the longest, but it doesn’t come with the risks of debt relief. You get to keep your home, car and anything else you have as collateral.

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

Frequently asked questions

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