Debt settlement services often sound attractive initially. The idea of settling a debt for less than the full amount due is obviously appealing to those struggling with their budgets. The ability to arrange for a debt settlement without actually negotiating with creditors is even more appealing.
Debt settlement services advertise aggressively and tell consumers that they can help them reduce what they owe to improve their finances. Unfortunately, many of the people who turn to debt settlement services do not get the fresh start that they expect.
Instead, they simply change what companies receive monthly payments from them. Debt settlement services are often for-profit businesses that want to charge a fee and provide a loan. People who rush ahead with debt settlement may feel dissatisfied with the outcome.
How debt settlement works
Creditors owed large amounts of money often agree to a reduced lump-sum payment to eliminate the outstanding debt. Settling debts usually results in the company closing the line of credit.
Negotiating those arrangements can take hours. Companies that call credit card providers and similar lenders to negotiate debt settlements typically charge a fee for their services. Even if they claim to offer their financial assistance for free, they may profit off of providing a loan.
Debt settlement typically requires financing. People eliminating their credit card debts with a payoff need money to make that lump-sum payment. Debt settlement can reduce the total amount owed but still results in ongoing debt in most cases.
In addition to owing money to the settlement company or their lending service, the person settling their debts loses their flexible revolving lines of credit. The companies that settled their debts may report the account as settled rather than paid in full to the credit bureaus. The closing of multiple accounts and records of settlements can significantly drag down an individual’s credit score.
Bankruptcy is often a better solution. It can permanently eliminate eligible debts instead of simply moving them from one lender to another. Bankruptcy also replaces multiple credit report blemishes with one single negative entry.
Those contemplating aggressive solutions for debt may want to think about bankruptcy in addition to debt settlement services and similar options. Filing for personal bankruptcy can be the start of a more stable financial future.
