Is it a Good Idea to “Settle” Your Debt?

They really make it look or sound like they’re doing you a favor.

Maybe you get a letter in the mail. “For a limited time only, we’ll give you this special offer! We’ll accept $238 on your debt of $304.79, and then we’ll consider it paid in full!”

Sometimes you get the offer over the phone.

And sometimes, spurred on by things you’ve read or conversations you’ve had, you take a stab at settling for yourself. After all, getting creditors to leave you alone for “pennies on the dollar” doesn’t seem like the worst thing in the world.

And sometimes it is a decent strategic move.

But not always. You have to be aware of what you’re getting and what you’re giving up.

You won’t be cleaning up this entry on your credit report.

Settling debts can lower your credit score just as much as an open collection account can.

Your report will say, “Settled for less than the full amount owed.” The balance will show zero.

Future lenders don’t really like to see that other lenders got paid less than they were owed…even if in reality you repaid the debt three times over with interest payments alone.

So you’ll still be penalized, even though you’ve settled the debt.

You won’t be solving your overall debt problem.

If you’re like most Americans, this single collection item is not the only debt you’ve got to contend with.

Most people have multiple accounts carrying multiple balances. Indeed, the credit industry almost tries to force this by making your credit score somewhat contingent on your “credit mix.”

So if you have some sort of windfall, or lump sum, that will let you address all your debts at once, settlement can make sense. It can in fact make a lot of sense to try to settle with as many creditors as possible so you get to keep as much of that money as possible. At that point you’ll walk away from these negotiations debt-free.

But if you don’t, you’re just kind of throwing money away.

You will get this single creditor to leave you alone.

And if the creditor is particularly persistent, particularly rude, or particularly good at guilt-tripping you this may feel like the best news you’ve ever heard.

But there’s another way to get the creditor to leave you alone. In fact, there’s another way to get all your creditors to leave you alone.

The automatic stay, which goes into effect as soon as you file for bankruptcy.

See also: 5 Bankruptcy Myths You Should Stop Believing Right Now.

Need guidance on how to handle your debts?

Sometimes it’s hard to look at your own financial situation objectively. You’re in a state of high stress, because being in debt has a physical and mental component that can make you feel absolutely awful.

Coming in for a free consultation isn’t just about making a decision to file for bankruptcy. Maybe that’s the right move for you, and maybe it isn’t. Some people don’t need to file, for example.

See also: 5 Signs a St. Louis Bankruptcy is Right For You and 5 Questions You Need to Ask Your Bankruptcy Attorney.

But it can give you clarity from a professional who specializes in helping people solve their financial problems and obtain fresh starts.