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Why debt settlement companies aren't good bankruptcy alternatives

When we encounter financial problems, this can be very troublesome. In some cases, crunching numbers and a shot-term budget can clear us of these issues. However, for some California residents, this can become a much larger issue. When debt becomes overwhelming, we seek out options when our own initiatives do not work. The word bankruptcy can be scary, causing many to seek out alternatives.

Although there are debt relief options that can help individuals overwhelmed with debt to regain control of their finances, some of these options can be more burdensome. Take for example debt settlement companies. This debt relief method requires debtors to pay upfront fees that can be rather hefty. In addition, these companies often fail to deliver what they claim, debt relief.

Although the increased regulation and enforcement of these companies has resulted in less settlement companies preying on vulnerable individuals in debt, this debt settlement option is not always more beneficial than the bankruptcy process. Some consumers report positive experiences with these companies because they have done what they promised to do, which is to persuade at least some of the individual's creditors to forgive part or all of their debt in exchange for a lump sum payment.

But does this mean the person is better off than the position they would be in had they filed for bankruptcy? Those choosing to go with the alternative debt settlement might encounter long-term consequences. This includes paying taxes on forgiven debt and credit scores plummeting because of the interest being charged for new loans being applied for. Other downsides of these debt settlement companies include the fact that they can take years to negotiate and debts are usually settled for 45 to 50 percent of the current balance.

Part of the reason why individuals look poorly upon bankruptcy is because these debt settlement companies demonize them. They make it seem like they would be worse off and hit their credit score harder. Nonetheless, filing for a Chapter 7 bankruptcy could put a debtor is a better situation. They could eliminate debt and obtain a fresh financial start. While this might mean it is on their credit report for roughly a decade, it can timely address an individual's debt problems. Thus, it is imperative that debtors fully understand their options and how a bankruptcy filing could benefit them.

Source:, "Debt settlement a bad alternative to bankruptcy," Liz Weston, Aug. 29, 2017

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