"There is no fate that cannot be surmounted by scorn."
It’s because Squidward is actually in Hell and Bikini Bottom is his version of Hell with Spongebob and Mr. Crabs being his demonic jailers. His sentence is to live out an eternity in Minimum Wage checks, Unfulfilled Dreams and Artistic Mediocrity.
Instead of allowing himself to suffer, Squidward rails against the endless torture and does not back down when the horrors of Hell comes upon him.
He shares this version of Hell with Mrs. Puff, but unlike Squidward, Mrs. Puff has succumbed to the endless nightmares and has become numbed and Hollow, a shell of her former self.
So in this interpretation of hell, is Satan the big red guy with the claws or Spongebob?
Satan need not be one person exclusively! Hell is shaped by our failures and insecurities, which is A LOT.
How would Squidville fall into his hell?
Easy! A mirror!
Squidward discovers how much of a pretentious dullard he is and in doing so realizes that he can’t live with himself, much less other people just like him.
And so Squidward retreats to Bikini Bottom knowing that dealing with external Horrors is better than dealing with the horror of the Self ;)