Which is the better option?
Debt management plans have no guarantee that the creditor will accept a negotiated discount. Debt consolidators charge a fee regardless of whether a settlement is reached and often years go by with credit scores dwindling each month. It’s often better to reach a deal with the creditor directly then try to include them in a debt consolidation plan. Lump sums are needed. 1099s are sent for any forgiven amounts leading to a tax bill. Any negotiated agreement must be in writing preferably with a line item deletion with the credit reporting agencies or at least reflecting the debt as paid in full.
Bankruptcy, particularly a Chapter 7, is often much faster — only three months for a Chapter 7 discharge. While a Chapter 7 will remain on someone’s credit for 10 years, most people are able to get their credit score back up to high 600s or low 700s within six months to two years. Bankruptcy is a legal mechanism intended to let people start fresh and credit rebuilding takes much less time than most people think.