If you haven't filed bankruptcy yet, then you can. I am not overly familiar with the bankruptcy laws but I think there is a chapter 7 and a chapter 13. Someone should come along who knows about this better then I.
The statement the letter made sounds like a threat to me. Is this the first letter you have gotten regarding this account? If it is, they may be in violation since any letter asking for payment of a debt must, by law, have the little disclaimer about having 30 days to dispute the validity of the debt and also the notice that the letter is from a debt collector. Even if it is a law office, if they engaged in the collection of this debt then they have to follow the collection laws (don't let them tell you any different).
You mentioned you were with a debt settlement company, have you spoken to them about this debt? Have they helped you with any other debts of yours?
There is alot you can do on your own, as it is your legal right to request validation from -anyone- who demands money from you. Bankruptcy should be a last resort.
This account the letter was about, what type of account was it and when was the last time you paid anything on it?