Debt Settlement Programs

Debt settlement differs greatly from credit counseling and Debt Management Plans. It can be very risky, and have a long term negative impact on your credit report and, in turn, your ability to get credit. That's why the FTC and many states have laws or rules regulating debt settlement companies and the services they offer. Contact your state Attorney General for more information.

The Claims

Debt settlement firms may claim they'll negotiate with your creditors to reduce the amount you owe. Some debt settlement companies may claim that they can arrange for your debt to be paid off for a much lower amount – anywhere from 30 to 70 percent of the balance you owe. For example, if you owe $10,000 on a credit card, a debt settlement company may claim it can arrange for you to pay off the debt for less, say $4,000. Some debt settlement firms may also claim to be nonprofit.

Debt settlement firms often pitch their services as an alternative to bankruptcy. They may claim that using their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be removed from your credit report when you complete their debt negotiation program. The firms usually tell you to stop making payments to your creditors and, instead, send payments to the debt negotiation company.

The firm may promise to hold your funds in a special account and pay your creditors on your behalf.

The Truth

There is no guarantee that the services debt settlement companies offer are legitimate. There also is no guarantee that a creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late fees and usually are added to the debt each month. If you exceed your credit limit, additional fees and charges also can be added. This can cause your original debt to double or triple. All these fees will put you further in the hole.

While creditors have no obligation to agree to negoti- ate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the may consider any amount of forgiven debt to be taxable income.

Accurate negative information may stay on your credit report for up to seven years.


Amendments to the FTC's Telemarketing Sales Rule prohibit companies that sell debt settlement and other debt relief services on the phone from charging a fee before they settle or reduce your debt.

If you do business with a debt settlement company, you may be required to put money in a dedicated bank account, which will be administered by an independent third party. The account administrator may you a reasonable fee, and is responsible for transferring funds from your account to pay your creditors and the debt settlement company when settlements occur. See Settling Your Credit Card Debts.

Disclosure Requirements

Before you sign up for the service, the debt settlement company must give you information about the program's:

  • Price and terms. The company must explain its fees and must tell you about any conditions on its services.
  • Results. The company must tell you how long it will take to get results. That is, how many months or years before the company will make an offer to each creditor.
  • Offers. The company must tell you how much money or what percentage of each outstanding debt you must save before it will make an offer to each creditor.
  • Non-payment. If the company asks you to stop making payments to your creditors – or if the program relies on your not making payments – the company must tell you about the possible negative consequences of doing so.