What is Debt Settlement?
Debt settlement can seem like a very appealing option when you are struggling to meet your financial obligations. It’s not as drastic as bankruptcy and it lets you off the hook for the insurmountable amount you owe.
It’s as if it’s too good to be true.
And this is because it often is just that. Rarely do debt settlement companies deliver on their promises and you’re stuck in a worse position than if you’d done nothing or if you’d filed for bankruptcy.
Debt Settlement Companies Promise Relief that Never Comes
Unfortunately, there are far too many people out there scared of what comes next when they are facing financial problems. They get calls daily from aggressive debt collectors, they might be served with a lawsuit, and their credit is an abysmal mess. Wage garnishment or levied bank accounts or foreclosure could be in their future.
Then in walks a debt settlement company offering to make it all better when in reality, their problems are only going to get worse.
The truth is that most debt settlement opportunities fail to offer a debt-free life and they result in credit that is damaged more than it would have been in bankruptcy. In many cases, the person dealing with debt problems ends up filing for bankruptcy anyway, but from a much worse place than had they opted for that in the first place. Some aren’t even able to afford bankruptcy because of what debt settlement costs them.
So Why Do People See Debt Settlement as Such an Appealing Option When It’s Most Often a Mistake? There Are Several Reasons:
- It relieves them of the emotional burden tied to debt. You’re paying someone to take care of your debt issues for you so you don’t need to worry about them any more (except you will need to worry and your worries will be even worse).
- It offers a “less frightening option” to those who are afraid of bankruptcy. Filing for bankruptcy is seen as a last resort and comes with a great deal of perceived judgment. So-called financial experts badmouth bankruptcy and many people don’t view it as a viable option for fixing a problem, so they choose debt settlement instead.
- Debt settlement companies make it seem alluring with well-crafted sales pitches that create a sense of magic and the sense you are getting away with something without breaking the law or creating any long-term consequences.
- It doesn’t seem like the cop-out that some people see bankruptcy as. Settling their debt allows them to pay some of what they owe, as opposed to bankruptcy where your debts are discharged. They just feel morally wrong for not paying anything on a debt that is rightfully their own.
Unfortunately, and regardless of how noble it might be to attempt to resolve debt through a settlement, you are not working with someone who has your best interest in mind. Debt settlement companies are in the business of making money and they make sure they get theirs first. This means that much of what you pay them to supposedly settle on your debt doesn’t even go to your creditors – it stays in the settlement company’s pocket.
You can read more about how the debt settlement process works in this article from The Balance.
Debt Settlement Programs Can Worsen Your Financial Situation
You could pay a debt settlement company for months without ever seeing any benefit. You’ll be in worse financial shape and it could be even more difficult for you to file for bankruptcy. Instead of saving your filing fee, you’ll be paying the debt settlement company to do very little, if anything, for you.
Even if you believe bankruptcy isn’t the right option for you and you’d like to explore debt settlement, it’s important to look at all of your choices. Make sure you understand the truth about your bankruptcy and debt relief options and that you are making the best decision based on your specific circumstances.