People saddled with debt may fear the stigma associated with bankruptcy and turn to other ways to find freedom from their financial troubles. Sometimes they turn to companies who claim they can work things out with creditors. However, debt settlement companies may actually give you bad advice that can cause you greater problems and dig your financial hole even deeper.
Nerdwallet explains that the usual practice of many debt settlement companies is to ask their clients to cease paying creditors. Clients will instead deposit their money in an account controlled by the settlement company. In the meantime, the company will negotiate on the behalf of the client to reduce the debt. The idea is that the creditor will accept a smaller amount on the debt instead of risking the chance the creditor cannot pay any of the debt back.
However, this approach carries risks. Creditors may refuse to reduce your debt. Stopping payments also does not stop the various efforts by creditors to try to collect from you. Creditors may also pursue lawsuits against you to gain outstanding payments through property liens or wage garnishments. Interest may continue to accumulate on your outstanding debt.
Stopping your payments also adds to your debt, which can negatively impact your credit score. Debt already causes a credit score to suffer, and halting payments will only make it worse. While you may have heard that bankruptcy also hurts a credit score, bankruptcy at least deals with your debt and offers you a fresh start. By contrast, debt settlement negotiation may take months before creditors decide to make settlement offers.
Debt settlement can become a trap for some people. This is why some people pinched by debt ask experienced debt relief attorneys for other options to explore. Credit counseling and bankruptcy in its various forms can offer alternatives that people may feel more comfortable with and pose a greater chance of ending debt problems.