Debt settlement vs bankruptcy: Which is better for your credit?

Compare debt settlement vs. bankruptcy

Two ways to rid yourself of overwhelming debt — but both come with major drawbacks.

Debts settlement and bankruptcy are sometimes discussed as giant delete buttons for your debt. But neither are free: You’ll pay for each service, not to mention the time and emotional energy.

Each does, however, offer the opportunity for you to rebuild your personal finances — and your life. We compare the benefits and drawbacks of each option to help you decide whether either can get you on the road to financial recovery.

How debt settlement and bankruptcy stack up on 6 important features

Debt settlementChapter 7 bankruptcyChapter 13 bankruptcy
Approximate cost20% of debt, plus income taxesWithout lawyer: $335
With lawyer: $835–$3,835
Without lawyer: $310
With lawyer: $1,810–$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
Speed2–4 years3–6 months3–5 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?

Everyone’s heard of bankruptcy, but debt settlement is less known. 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 — but not without a cost.

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 available only for people with a lot of unsecured debt — or 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 that you control. Money in this account is used by the company to cover the cost of settlement and the fee for using its services.

But debt settlement is not guaranteed to work: Some creditors refuse to settle debt. 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, a 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.

The most common types of bankruptcies for individuals are Chapter 7 and Chapter 13.

With Chapter 7 bankruptcy, your goal is a discharge — or 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 such assets as your home.

Chapter 13 is closer to debt relief in that it wipes out part of your debt, the rest of which you have to pay off with a repayment plan, typically over three or five years. Unlike with Chapter 7, you get to keep your assets.

Keep in mind that bankruptcy lawyers are required to prioritize your interests, protecting you against unnecessary penalties. Debt settlement companies are not.

Which costs more?

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

Debt settlement

Debt settlement companies typically charge a fee that’s around 20% of your enrolled debt. Legally, they can collect this fee only after they’ve settled your debt. You might also need to pay income taxes on any debt that is settled.

Keep in mind that your debts are accruing interest while you’re enrolled in the program, plus any late fees. In the end, you might only save around 10% of what you owe.


When you file for bankruptcy, you can often get away with paying only a filing fee of $335 for Chapter 7 and $310 for Chapter 13. You might qualify for a fee waiver if your income is 150% below the poverty line.

The real expense with bankruptcy, however, are the fees you’ll pay for legal services. Getting a lawyer significantly increases your chances of success, though it won’t guarantee a successful win. Chapter 7 legal fees can range from $500 to $3,500, while Chapter 13 legal fees typically fall in the range of $1,500 to $6,000.

Compare debt settlement companies

Rates last updated February 23rd, 2018
Unfortunately, none of the short term loan providers currently offer loans in your state. Learn more about short term loans in your state to find an alternative.
Name Product Product Description Costs Requirements
Freedom Debt Relief is a debt settlement company that works to help people with unmanageable, unsecured debt get back on their feet.
Monthly payment based on enrolled debt, no upfront fees
Must have at least $15,000 in unsecured debt and live in a serviced state.
Get back on your feet with a top-rated debt relief company that works with multiple types of debt.
18–25% 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.
This A+ BBB-rated service offers free consultations to lower your monthly payments help you get out of debt faster.
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.

Compare up to 4 providers

Which damages your credit more?

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

A Chapter 7 bankruptcy stays on your credit report for 10 years, and Chapter 13 for seven. Filing for either type of bankruptcy 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. Your credit score can also 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 repayments on your debt in anticipation of a successful settlement, you risk defaulting on your debts if it doesn’t come through. (You can continue paying your creditors throughout the settlement process, but most people don’t due to the expense). You’ll mar your credit report and might be left with no alternative to bankruptcy.

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, if you have less than $1,184,200 in secured debts and $394,725 in unsecured debts, you might qualify for Chapter 13 bankruptcy as long as you’re also employed.

Qualifying for Chapter 7 bankruptcy is a lot 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 — around 95% of those that file with a lawyer.

A little more than half of Chapter 13 bankruptcy cases are successful, a 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 since 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

Anna Serio

Anna Serio is a writer at finder who specializes in loans. She spent the past five years living in Beirut, where she worked as a news editor and hung out with a lot of cats. She loves to eat, travel and save money.

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