If your credit card balances have been steadily increasing or if you have cards that are already maxed out, you probably experience a lot of stress about your financial situation. When you hear an ad on the radio or see a post on social media talking about how credit card settlement could help you get rid of that debt while only repaying a fraction of the full amount, it may sound too good to be true.
That’s because those advertisements don’t really tell you about how those programs work. You think that you might get some free support that helps you get back in control of your financial situation. What may ultimately end up happening, however, is that you wind up even worse in debt and struggling with a lower credit score.
How debt settlement works
In a credit card debt settlement arrangement, a borrower or someone representing them contacts the credit card company to ask for a reduced settlement amount if they pay the full balance at once. Credit card companies, worried that they could receive nothing should that person file for bankruptcy, may agree to accept only a fraction of the full balance owed on the account.
Since the person needing financial assistance probably doesn’t have thousands or even hundreds of dollars at their disposal, the business offering the credit card settlement help will probably open a new line of credit in their name and use the funds to pay off the credit card companies.
Not only does that mean that the person will have another debt to worry about, but each of the accounts that they settle could report the settlements to the credit bureaus, dragging down their credit score and making future credit harder to obtain. That borrower may then find themselves dealing with big payments to the debt settlement company while also struggling to make ends meet with no revolving credit available to them.
Bankruptcy can be a cleaner and more effective solution
Debt settlement services mean that credit card companies write off debt and take a loss and also that the individual borrowers have negative credit and financial consequences. Compared with all of the frustration and risk involved in debt settlement, bankruptcy might be a more effective solution.
When someone files for bankruptcy, they can potentially receive a discharge of all of their unsecured debt, helping them regain control over their budget. Bankruptcy also helps by eliminating all of those negative marks on someone’s credit report and replacing them with one, major blemish. After just a few months, someone who successfully files for bankruptcy may start to qualify for new lines of credit.
Considering bankruptcy as a possible solution to your credit card debt could help you regain control over your financial situation.