Debt settlement companies make their services sound like a miracle solution to your financial hardship. They advertise on the radio that they know a secret that can help you pay just a fraction of what you actually owe for your credit cards or medical debts.

Negotiating a settlement for your outstanding, unsecured debts might sound like a great solution, but there are plenty of problems with this approach to personal debt. In fact, debt settlement can often leave you at a substantial financial disadvantage when compared with bankruptcy. After bankruptcy, you have a fresh financial start. After debt settlement, you have a low credit score and possibly still debt.

Debt settlement isn’t going to do your credit any favors

If you find yourself considering debt settlement instead of bankruptcy, the reason why could be your concern over how bankruptcy proceedings might impact your credit score. Settling your debts means paying your creditors at least a portion of what you owe, which might make you think that a settlement would have a positive impact on your credit score.

However, the company can continue to report your missed and late payments, as well as the fact that you settled the amount owed for a fraction of what you should have paid. The multiple missed or late payments and the settlement mark from the company will have a significant negative impact on your credit score.

The more creditors that you settle with and the less you pay them, the more your settlements will drag down your credit score. Those settlement marks and late payments can stay on your credit report for a full seven years.

You may have to take out a loan to finalize the settlement

What companies often aren’t transparent about is the fact that when you settle a debt, the company receiving the settlement expects a lump-sum payment up front. They won’t settle the debt and then let you make tiny payments over the next few months. They want everything right away.

If you already struggle to make the minimum monthly payments on your accounts, you may need to take out a loan to pay those settlement amounts. The company offering the debt settlement services may provide you that loan, but they may have fees rolled into the plan. Additionally, there’s nothing to prevent you from racking up even more unsecured debt while you still need to repay the settlement loan.

Bankruptcy, on the other hand, will stay on your credit report for seven or 10 years depending on the form you pick. It will get rid of all of those other blemishes from late payments and completely get rid of the obligation to repay your unsecured debts.