Bankruptcy in 4 Months or Debt Settlement in 3 Years: Which Path Costs Less

On a recent episode of NerdWallet’s Smart Money Podcast, Budget Rehab: How to Stop Paying Only Interest and Make Real Progress on Credit Card Debt, the hosts told a caller that bankruptcy attorneys “have ways to work with clients” to cover upfront filing costs, and that “people can often discharge their debts in just a few months” while debt management or DIY payoff “is going to be a few years before you’re fully out of this debt.”

The stakes are concrete. If you are only covering interest on a credit card balance, every month you delay exploring bankruptcy is a month of cash going to the issuer with no progress on the principal. Choose the wrong path and you can spend three to five years grinding through a settlement program while the math of a Chapter 7 filing would have cleared the same debt before next Thanksgiving.

The verdict: the podcast is right, and the math is brutal

The advice is sound. For most people who can genuinely only make interest payments, bankruptcy is faster and often cheaper than DIY payoff or a debt settlement company. Here is the math nobody runs for you.

Take a realistic case: $25,000 in credit card debt at a 24% APR. That is roughly the going rate, because credit card pricing has barely budged even after the Federal Reserve cut its target three times over the past year to 3.75%. Card APRs sit far above the benchmark and the issuers have been slow to pass savings to consumers.

At 24% on $25,000, the interest alone runs $500 a month. If $500 is what you can pay, you will never touch the principal. To clear the balance in five years you need roughly $719 a month, and you will have paid about $18,000 in interest along the way. That is the “DIY payoff” path.

Now the debt settlement path. National Debt Relief and similar firms typically take 24 to 48 months, charge fees of 15% to 25% of enrolled debt, settle for 40% to 60% of the balance, and leave you with a 1099-C for the forgiven amount (taxable as ordinary income). On $25,000 you might pay $10,000 to $15,000 in settlements plus $3,750 to $6,250 in fees, with credit damage almost as severe as bankruptcy.

Now Chapter 7. The court filing fee is $338. Attorney fees for a straightforward consumer case typically run $1,000 to $1,500. The case usually closes in four to six months, and qualifying unsecured debt is discharged. Total out-of-pocket: under $2,000 against $25,000 wiped.

Put plainly: the DIY grind costs five years and $18,000 in interest. Settlement costs three years and $14,000 to $20,000 all-in. Chapter 7 costs roughly four months and under $2,000.

The variable that flips the answer: the means test

One factor determines whether Chapter 7 is even open to you: your income relative to the median in your state. If your household income is below the state median, you generally qualify. If it sits above the median, the means test runs an expenses analysis, and you may be pushed into Chapter 13, which is a three-to-five-year court-supervised repayment plan rather than a quick discharge.

This matters more than it used to. Average hourly earnings hit $37.41 in April 2026, but the personal savings rate dropped to 4.0% in the first quarter of 2026 from 6.2% in early 2024. Households are earning more on paper while saving less, which is exactly the profile that lands above the median income but still cannot service revolving debt. For that reader, Chapter 13 may stretch repayment to the same horizon as a settlement plan, and the math gets closer to a coin flip.

What to actually do this week

1. Call a nonprofit credit counseling agency accredited by the NFCC for a free budget review and a debt management plan quote. Get the projected payoff date and total interest in writing.
2. Book a free consultation with a consumer bankruptcy attorney. Ask whether you pass the means test in your state and whether they will roll filing costs into their fee.
3. If a settlement company is on your shortlist, request the all-in cost: fees plus settled balances plus the tax bill on forgiven debt.
4. Lay the three timelines side by side: months to debt-free, total dollars out, and credit-score damage. Pick the shortest, cheapest path you actually qualify for.

The shame attached to bankruptcy keeps people paying interest for years on debt a court could erase in months. Run the numbers before you decide it is off the table.