Debt settlement options typically come with unexpected downsides.

  1. The lender doesn’t want to settle cheaply, so the borrower is required to pay back a significant amount (i.e., low settlements are difficult to reach).

  2. Through a debt settlement company, this can take 2-4 years. Through an attorney, it may take less time.

  3. Through the process, the lender continues to update a default on your credit, thereby creating an enormous, long-term credit hit.

  4. The amount that is not repaid is usually considered taxable income by the IRS and State. https://www.irs.gov/taxtopics/tc431

In contrast, a bankruptcy

  1. Is mandatory, and the lender doesn’t have the ability to object in a typical case.

  2. Is an immediate event (i.e., there is typically no delay, and the relief is immediate).

  3. Prevents further credit reporting, so all updating comes to an end at the time of filing bankruptcy.

  4. The debts that are eliminated through bankruptcy are not considered taxable. https://www.irs.gov/taxtopics/tc431