Because a lot of myths surround bankruptcy, many people are reluctant to file even when it’s in their best interest. While alternative solutions like debt settlement are touted as better than bankruptcy, they actually have quite a few downsides. The Balance explains this process so you can make an informed decision about your finances.
Debt settlement companies claim to be masters at negotiation. When you sign up for services, you provide information on your debt and creditors and they work on your behalf to get it lowered. They may also ask you to stop paying creditors at the present time and instead remit payment to them. The goal is to effectively negotiate with your creditors so the accept the new low figure, which means you’ll make smaller payments and owe less money overall.
Of course, your creditors could refuse the requested lower payment. That means not only would you still be on the hook for the same amount as you owed before, but you’ll also be late on the payments you made to the debt settlement company instead of your creditors. You’ll also be out on the fee you remitted to the company for their assistance, which is money that could have gone to your creditors in the first place.
While both debt settlement and bankruptcy impact your credit score, bankruptcy ensures you retain certain property, such as your home and a primary vehicle. This might not be the case if your debt settlement agreement breaks down, which would result in you filing for bankruptcy anyway. If you have questions about bankruptcy and whether it’s right for you, the best course of action is to discuss the matter with an attorney.