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Is debt settlement a good alternative to bankruptcy?

Bankruptcy is not something most people embrace enthusiastically. Along with financial consequences, it comes with a social stigma and many myths that can make you hesitant to file even though you are swimming in debt. Perhaps you are considering alternative forms of debt relief.

One you may look into is debt settlement. This approach involves a third party negotiating your debt with creditors to reduce or eliminate what you owe. The idea may sound promising, especially if it means you can avoid bankruptcy, but is it the best choice?

The problem with debt settlement

When it comes to handling debt, never is the advice "if it is too good to be true, then it probably is" more applicable. The disappointing reality is debt-settlement companies more often make your situation worse than help you get out of it. The Consumer Finance Protection Bureau does not recommend using these services due to their high risk of fraud. Watch out for claims of complete debt elimination and counsel to cease payments to creditors.

Even if a company is legitimate, it often leads to even more bills due to the following:

  • High upfront costs
  • Hidden fees
  • Penalties from creditors
  • Failure to settle debt

The money you may save on repaying debt likely will end up going back to the business. The process may also harm your credit.

Why bankruptcy is a good option

Bankruptcy gets a bad rap, but it is actually more beneficial than you may think. Yes, bankruptcy stays on your credit history for years, but that does not mean you have bad credit. It will help you build up your rating faster than staying in debt or using debt-relief services. It may not eliminate all debts depending on how you file and what money you owe, but it will never be a scam.

Declaring bankruptcy also stops creditor harassment and suspends repossession and foreclosure. It gets you back on your feet and helps you prevent the situation again through financial classes. 

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