Are Debt Settlement Companies a Good Option?

When one is struggling under heavy bills, debt settlement companies appear to offer some type of relief . But do they really offer a legitimate service, or are they simply scam operations that only make your debt problem worse?

What is Debt Settlement?

“Debt settlement” means convincing creditors to accept a lump sum that is less than the total amount of the outstanding unsecured debt.

So, for example, you owe $10,000 on a credit card and are on the verge of bankruptcy. In such a situation, it may be possible to negotiate a settlement equal to 75 percent or even half of the outstanding amount.

The reason an unsecured creditor might accept such a settlement? Half a loaf is better than none, and since it is an unsecured debt, it can be discharged in bankruptcy – and the creditor would get nothing in that event. In some cases, such a settlement can help a consumer avoid bankruptcy, while the creditor at least gets something.

How Do You Get Debt Settlement?

Although one may be able to negotiate a debt settlement on their own, they may choose to hire an attorney to do it – or they turn to one of many debt settlement companies that advertise such services. Their advertisements usually claim that they can settle your outstanding debts for “pennies on the dollar,” which may or may not be true – but they’ll charge a hefty fee for their services either way.

How do Debt Settlement Companies Operate?

Once a client has signed on with a debt settlement firm, they will be required to make monthly payments to the company. The company will tell the client that once sufficient funds have been deposited, they will contact the creditor(s) and negotiate the debt down to half the amount – and may even claim to be able to do better than that.

Are They Legit?

Some debt settlement programs may be legitimate; many others are not. In either case, the debtor will typically be charged a sizable up-front fee and will be told to stop paying on the outstanding debt until they are “ready” to negotiate on your behalf. In the meantime, the amount of that debt balloons with the accumulation of interest, penalties and the ever-present threat of collection action – while your credit score takes a nosedive.

The worst part of all of this is that there is no guarantee that creditors will even negotiate since they are under no legal obligation to do so. According to Credit Karma, even if the company manages to negotiate your debt to a lower level, your credit score will still take a hit – and under IRS rules, any amount that is forgiven may be considered taxable income.

If Debt Settlement Companies are Scam Operations, Are They Ever Prosecuted?

In fact, the Federal Trade Commission has brought many legal actions against companies that claim to settle debts, repair damaged credit and lower monthly payments. They have also teamed up with state governments to prosecute or sue.

There are also federal laws in place that prohibit debt settlement companies from making unsubstantiated claims and charging any fee until they actually settle a consumer’s debt. FTC regulations also requires them to provide full disclosure up front.

Many companies are trying to take advantage of consumers and the increased amount of debt most families are carrying these days. These companies often say that they are going to provide a loan, and then try to get you to sign up for some debt settlement or consolidation service that may actually make your credit situation worse off.

To top it off, these companies—not to mention debt collectors—often call or text you without your consent. We are investigating numerous practices like these and others that are rampant in the consumer credit, debt collection and credit repair industries.

Join a Free Debt Consolidation Class Action Lawsuit Investigation

You may qualify for this investigation if a debt settlement or credit repair company did one of the following:

• Sent a loan offer or offered credit, rejected your application, and then pitched their debt program;
• Required payment for credit repair services up front and you were not provided with a full disclosure in writing; and/or
• Promised to help but left you in either the same or worse financial condition.

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This article is not legal advice. It is presented
for informational purposes only.