Because bankruptcy carries a stigma in the minds of many people, some people try to resolve their mounting debt in other ways, such as hiring a debt settlement company to reduce or eliminate their debt. However, going with a debt settlement company carries some risk and may even worsen the situation of a debtor.
While bankruptcy might seem like an unattractive option, going through bankruptcy can provide a way to eliminate burdensome debt and stop creditor harassment. By contrast, a debt settlement company cannot compel a creditor to stop collection efforts. Nerdwallet explains the various problems that may arise by going with a debt settlement company.
Refusing to negotiate
Debt settlement companies negotiate on behalf of a client to reduce or eliminate outstanding debts. However, a creditor does not have to cooperate with a debt settlement company. In fact, some creditors refuse to negotiate with debt settlement companies at all. By the end of the process, a debt collection company may only be able to negotiate down a small amount of debt, if any at all.
Decreasing a credit score
Debt settlement companies generally instruct their clients to stop making payments and to divert the money to a savings account. Over time, the client will deposit an amount that the settlement company will take to a creditor to offer to pay off a certain amount of the debt.
However, halting payments to a creditor does not mean the stopped payments will not impact a credit score. Delinquent payments will continue to lower a credit score even if the person involved is negotiating for a debt settlement. And if the negotiations fail, the client is stuck with a worse credit score than before the debt settlement negotiations began.
Running into scams
According to the FTC, some debtors unwittingly hire debt settlement companies that engage in deceptive practices to get money out of clients. These bad actors often make promises that they cannot deliver on. They urge clients to take actions without explaining the risks involved, like stopping payments to creditors. These companies may not point out that their creditors may continue to try to collect or that their credit score may suffer. Careful research is sometimes needed to find out whether a debt settlement company is reputable or not.