Here are a few things that may help you decide if you should choose bankruptcy vs debt settlement. First, you will want to look at all of your debt, not merely credit card debt. If your debt is mostly unsecured debt then you will need to determine the amount of that kind of debt. If the unsecured debt is excessive (greater than 25% of your annual income) it is doubtful that a debt settlement will work since you will usually need to pay about 70% of the debt back. Usually to get a voluntary reduction in the credit card debts you will be required to make that payment in a lump sum to the credit card company, because of this you will need to have enough cash on hand to make such a payment. So if the amount of this type of debt is large your lump sum payment will also be quite large.
Second, if you have both secured debts (i.e. car loans, mortgage, etc.) and unsecured debt (i.e. credit card debts, medical debts, check loans) you will want to look into filing for bankruptcy. There are several different types of bankruptcy that you may be able to use. For most people they can do either Chapter 7 bankruptcy or Chapter 13 bankruptcy. If you can meet you monthly living expenses and still have left over funds then a debt settlement might work for you as opposed to a bankruptcy if you can get your creditors to work with you on a repayment schedule that you can afford.
On the other hand if you think you have the ability to repay a portion of your debts then a Chapter 13 bankruptcy may also be a great option since you and your attorney have the ability to prepare a repayment plan that you can afford and have a bankruptcy court oversee your repayment plan. Basically you are doing a debt settlement with the power of the bankruptcy court behind you. In this scenario your creditors work with your attorney, under the watchful guidance of a trustee and the court, to come to an agreement on the amount of the debt that will need to be re-paid based upon your ability to repay them over a 36 to 60 month period.
In a debt settlement you can try and negotiate debts like student loans and settle other debts with the creditors on your own, but it can be difficult to get all your creditors to agree to a voluntary reduced repayment amount and there is no legal enforcement to your agreement if the creditor changes their mind at a later date. Also beware of the fees charged by the debt settlement company since they can be excessive. Also in bankruptcy you don’t usually have to pay taxes on any of the debt that was forgiven; whereas in a debt settlement you might have to pay taxes on the forgiven debt amount.
Finally both debt settlements and bankruptcies will have an equal impact on your credit report.
As you can see from this brief outline of options, bankruptcy vs debt settlement can get complex and messy real quickly, based upon the types of debt you have and your income level. An experienced bankruptcy lawyer can walk you through your options. A good bankruptcy lawyer will tell you if bankruptcy is not in your best interest and point you in the direction of debt settlement if that in fact is in your best interest. Most bankruptcy lawyers I know offer a free consultation and can look at your situation and offer direction in your current situation. In Utah we do this at my office every day.