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Why so-called debt solutions often leave people in worse debt

On Behalf of | Jun 8, 2021 | Bankruptcy

Topical information about debt solutions is everywhere. You may have heard it advertised on the radio or even seen a television commercial.

Companies are quick to make claims about how their debt solutions could truly benefit the audience members. They claim to have settled credit card debt for other people or to have helped those considering bankruptcy consolidate their high-interest loans to save them money.

These debt solutions seem like a great option, but many people who pursue them simply wind up further in debt. Why don’t debt solutions work the way that companies claim they do? 

So-called debt solutions often involve taking on more debt

Both debt settlement services and debt consolidation companies offer their services as low-cost or free solutions without mentioning that you will have to take out a new loan. Debt consolidation loans are obvious sources of new debt because you have to have a new line of credit or loan large enough to repay all of your outstanding balances.

Fewer people understand that loans are often part of debt settlement services as well. The company will reach out to credit card issuers and negotiate a settlement that doesn’t require the total repayment of your balances. However, to have the cash on hand to pay those amounts, you will likely have to open a line of credit with the company negotiating on your behalf.

Neither of these systems necessarily prevents you from using those same credit cards and accruing high balances again or even opening new credit cards. Instead of being a path toward financial freedom, what they might do is double or even triple your debt load within a few years of attempting them.

Why bankruptcy is better

Bankruptcy may not seem like the best solution because it is drastic. It will affect your credit score and limit your credit options for several years.

However, the trade-off is that a successful bankruptcy filing leads to the discharge of your unsecured debts. That means you won’t have to repay those credit card balances. You can instead close the account and allocate the money previously used to make those minimum payments every month to other parts of your budget.

If you understand the limitations of debt solutions, you may come to appreciate that filing for personal bankruptcy is a solution as opposed to a service that only addresses the symptoms of the problem, not the underlying cause.