The situation where debt settlement may be more beneficial than bankruptcy is when you have substantial assets than could be lost if you file for bankruptcy protection.
We see clients on occasion where their assets exceed their debts, but it may be the only savings they have, or need the funds for retirement, and they are looking for a discount on the amount owed.
In many cases clients have already paid back the creditor the original amount charged, and they are just working on the interest, so if the creditor offers a discount, they are just losing the money from fees and interest.
Also if you stop paying on credit cards the balance can increase substantially from the charges on the card until it is charged off. Charging off does not mean you do not owe the debt, it just means they are writing it off for tax purposes.
In some cases after the debt is charged off they sell the debt to a debt buyer. The debt buyer in most cases will charge back fees and interest on the debt, creating a much larger bill than you started with.
If they send it to an attorney it gets even worse, since you have to pay the creditors filing fees, costs, and attorney fees as part of the credit card agreement.
This is why they can offer you a discount on the full balance, because most of the balance is fees and interest.
The other problem experienced by people going through debt settlement is they receive a 1099 for the phantom debt settlement income. This means you have to pay tax on the settled debt and count it as income on your tax return.
This can come as an unwelcome surprise to people who have settled their debts.