Nobody relishes the idea of filing for bankruptcy, so it’s no surprise that many people struggling with debt are eager to find a viable alternative. Unfortunately, people in difficult circumstances don’t always make a thorough, objective assessment when an option appears to offer hope. Sometimes, what begins as an understandable and respectable desire to pay off or settle debt leaves an individual or family worse off than they were before.
Debt settlement often sounds like an attractive alternative. Many debt settlement companies advertise that you can settle your debt for pennies on the dollar or get out of debt much sooner than you might have believed possible. However, debt settlement can have a negative impact for many reasons, not the least of which is that those representations aren’t always accurate.
Anyone considering that approach to debt management should thoroughly educate himself or herself about how debt settlement works, and about the specific debt settlement company.
Debt Settlement Risks
Not All Debt Settlement Companies are Honest
Of course, there are good and bad companies in every industry, and it always pays to research the companies you do business with. However, the debt settlement industry can be particularly risky. In fact, the Federal Trade Commission (FTC) warns about both debt settlement scams and the general risks of the debt settlement model.
In 2017, the Consumer Financial Protection Bureau (CFPB) sued the nation’s largest debt settlement company, alleging that the company had misled consumers and taken unearned fees.
Downsides of the Debt Settlement Model
In theory, a debt settlement company will negotiate lump-sum payments that will substantially reduce your total payout. However, it doesn’t always play out that way, for several reasons:
- Not all creditors are willing to work with the debt settlement company. This may be the result of a blanket policy, or the creditor may simply believe that it can do better by pursuing collections than by negotiating a lump-sum settlement.
- You may be unable to keep up the payments. Debt settlement can’t work unless the company has a pool of money from which to negotiate settlements. That means the success of any settlement effort depends on the consumer being able to make regular payments into that fund. But, people already facing financial difficulties often find that they can’t maintain the schedule
- Debt settlement can hurt your credit. Of course, anyone in a position to be considering bankruptcy or an alternative like debt settlement has probably already seen a decline in his or her credit score. But, because debt payment programs often require stopping payment to creditors while you build up a fund, the impact on credit can be devastating.
A Local Bankruptcy Lawyer Can Be Your Best Source of Information
If you’re struggling with debt and unsure whether bankruptcy may be the best solution for you, doing your homework makes sense. But, the available options can be confusing—especially when some providers are making big promises in their advertising.
An experienced consumer bankruptcy attorney can help assess your financial situation and the options available to you.
The information presented in this post is not legal advice and does not form a lawyer/client relationship. Laws and circumstances can differ and change.
Please contact us for a personal review of your situation