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For some reason putty works but iTerm has the backspace issue. Putty user: what's your $TERM?

Ctrl H works as a workaround BTW.

$TERM from PuTTY - xterm $TERM from Terminal.app - xterm-256color

It may just be the settings in your SSH client (some of them are weird). Which SSH client are you using and have you tried any others?

What about ^H?

Works as backspace. DEL is working, but not updating the screen if that makes sense.