Debt relief companies often capitalize on the fear associated with bankruptcy to sell lower monthly payments and forgiven balances. After all, why would reasonable Ohio residents struggling with debt consider destroying their credit and losing everything when there is another option?

Yet, these companies are no different than most others in that there is fine print that they often fail to disclose. Furthermore, the methods they use might ultimately cause more damage than they seek to relieve.

Why debt relief programs do not work

According to Forbes, most relief programs work out settlements with consumer creditors, but only after the debtor has triggered default by withholding payments for a minimum of six months. After these negotiations, creditors may forgive portions of outstanding balances, and if this amount exceeds $600, it becomes taxable income and reportable to the IRS.

Meanwhile, creditors have the option to report every missed payment and lowered settlement amounts as negative items to the credit bureaus. These can remain on credit histories for up to seven years.

Even worse, debt relief companies are not always successful at their negotiations. Consumers could remain liable for the total debt, fees for nonpayment and lawsuits from creditors.

How bankruptcy does work

NerdWallet reports that while Chapter 7 or Chapter 13 bankruptcy may not be the best option for everyone, there are some essential truths to understand:

  • Bankruptcy addresses most types of debt
  • Chapter 7 credit recovery often begins within months
  • Bankruptcy removes debt balances from credit reports
  • Chapter 13 filers generally keep their assets

There are exceptions, of course. Most student loans, child support and fraudulent debts are ineligible for forgiveness. A bankruptcy filing stays on an individual’s credit history for 10 years and can affect his or her access to affordable financing.

Still, studies show that people who filed for Chapter 7 bankruptcy tend to improve their credit scores faster and by a more considerable margin than those who attempt to repay their debt.