An important factor in deciding between debt settlement and bankruptcy is the effect they will have on your credit score. 

Debt settlement is the process of negotiating with each creditor in an attempt to reach an agreement where the creditor accepts a lesser amount than what is owed in satisfaction of the debt.  Although most creditors participate in debt settlement, they are often unwilling to do so unless you are delinquent.  Consequently, with debt settlement your credit score is negatively affected by several months of missed payments.  Although debt settlement is damaging to your credit, it looks more favorable than bankruptcy because you have paid at least some of the debt to your creditors. In addition, debts that are settled fall off your credit report seven years after the date of last delinquency. Therefore, if your debts are several years old when they are settled they will only affect your credit for a few more years.

Most individuals that file bankruptcy file under Chapter 7 or Chapter 13 of the bankruptcy code.  Chapter 7 bankruptcy wipes out all your unsecured debt giving you a clean slate.  Chapter 13 bankruptcy is a repayment of some or all of your unsecured debt over the course of three to five years.  Filing bankruptcy under either chapter will cause a significant drop in your credit score.  In addition, a Chapter 7 bankruptcy will remain on your credit report for 10 years from the filing date and a Chapter 13 bankruptcy will remain on your credit report for seven years from the filing date.  Creditors may view you as a higher risk with a bankruptcy filing on your credit report.

Although debt settlement is less damaging to your credit, if the debt amount is too high or your income is too low, bankruptcy may be the better solution to improving your credit score over time.  You should consult an experienced Phoenix debt lawyer and bankruptcy attorney to decide whether debt settlement or bankruptcy will improve your credit the fastest.