Function

• Both debt settlement and Chapter 7 are designed to help you deal with past due debt. Debt settlement allows you to pay less than what is owed on your debts while releasing you from any further obligation to pay. The function of a Chapter 7 filing is to allow debtors who have little assets and no means to repay their debts to obtain a fresh start financially.
  
  

Process

• The debt settlement process begins when you extend an offer to your creditor for a percentage of your balance owed. You may contact creditors directly or you can contract the services of a debt settlement company. If the creditor agrees to your offer, you pay the amount in a lump sum or over a fixed amount of payments. The creditor then agrees to write off the remaining debt.
  
  With Chapter 7, you initiate a petition in a federal bankruptcy court. You must attend credit counseling and provide the court with a complete account of your financial situation. Any nonexempt assets you have are seized, liquidated and distributed to your creditors. Upon discharge, you are released from any further obligation to your creditors.
  
  

Cost

• Debt settlement and Chapter 7 differ in terms of their cost. As of 2010, it costs $299 to file a Chapter 7 petition, according to the U.S. Courts. If you hire an attorney, you can expect to pay hundreds or thousands of dollars for her services. A debt settlement can help you to reduce what you pay and save you money on interest and finance charges. If you use a debt settlement company, you can expect to pay hefty maintenance and service fees, according to Smart Money.
  
  

Benefits

• Chapter 7 is most beneficial to people who want to get out of debt quickly and have no other means to repay. If you're facing a creditor lawsuit or other collection actions, filing a Chapter 7 petition enacts an automatic stay that protects you from your creditors. Debt settlement can also help you get out of debt quickly and save money if you have cash on hand to bargain with.
  
  

Considerations

• Before opting for debt settlement or Chapter 7, it's important to consider the long-term consequences. A Chapter 7 bankruptcy can remain on your credit for up to 10 years, making it more difficult to obtain new credit or favorable interest rates. Debt settlement also can be harmful to your credit since most creditors require you to be past due on your account before they will accept an offer. Additionally, you may have to pay income tax on the amount of debt that is written off if it's more than $599. Debt settlement also does not protect you against collection actions or lawsuits.