There are many types of businesses that market debt relief to the public. Credit card companies and a host of other financial businesses may tell consumers that they can help them reduce their overall debt levels and take control of their finances.
People coping with high levels of debt are often eager for any solutions that help them balance their budgets. Chapter 7 bankruptcy is often the fastest and most effective solution for people trying to regain control over overwhelming personal debt. However, many people turn to other so-called solutions because they fear the bankruptcy process. What they may not realize is that many of the debt solutions marketed by companies have the potential to worsen financial issues.
What types of debt solutions aren’t usually solutions at all?
1. Balance transfers
People who have accumulated a significant amount of credit card debt may receive balance transfer offers from one of their credit card companies or as an incentive to open a new line of credit. Balance transfers often involve a fee and can lead to the rapid accumulation of interest in many cases. They do not reduce or eliminate debt but merely change the lender.
2. Debt consolidation services
Some businesses advertise debt consolidation as though it is a miraculous solution for overwhelming financial pressure. They exaggerate how difficult it is to keep accounts in good standing when borrowers may have to make payments to multiple companies every month on different days.
Debt consolidation does not reduce the amount of debt owed or even necessarily reduce the interest rate that applies. It simply converts a variety of separate financial obligations into one larger debt. In some cases, debt consolidation they lead to people using additional credit after consolidating their balances, only to face overwhelming debt.
3. Debt settlement services
Some companies offer support when negotiating with credit card providers and other creditors. They claim to help people settle what they owe for less than the full amount due. Debt settlement companies often charge for their services.
Additionally, the act of settling a debt usually leads to the closure of revolving lines of credit. People’s credit scores often drop significantly after they settle debts. Additionally, they typically have to make payments to the company that provided the debt settlement services and likely provided a loan to facilitate the lump-sum payoffs of different creditors.
Filing for Chapter 7 bankruptcy is often better than utilizing for-profit debt relief services. Successful bankruptcy proceedings eliminate eligible debts and prevent aggressive collection efforts. Recognizing that certain kinds of debt relief don’t resolve underlying issues may help people make better choices when they can no longer consistently fulfill their financial obligations.