• Most debt settlement companies offer to help consumers reduce or eliminate their credit card debt
  • The Federal Trade Commission (FTC), Government Accounting Office (GAO), and others consider many of these offers to be scams
  • Know how to spot risky debt settlement offers and how to handle your high debt in other ways


You’ve undoubtedly seen or heard the advertisements flooding the television, radio and internet: “We can lower or eliminate your credit card debt for pennies on the dollar.” Is it a scam? Some think so.

Debt Settlement

Debt settlement or “debt negotiation” companies have been around for a number of years. However, since 2008 with the economic turmoil in the US, it seems there are more and more companies and firms offering debt settlement or debt relief. What we’re talking about here are for profit companies, not non-profit credit counseling services.

Here’s how the typical debt settlement offer works. In exchange for a fee, the company agrees to “work with” or negotiate with your creditors to reduce or eliminate your debts. For the most part, it involves credit card debt, but it may include other unsecured debt, such as medical bills. Common offers promise you a deal where you’ll only have to pay a little less or little more than half of what you actually owe – maybe $.40 to $.60 on the dollar.

You make monthly payments directly to the company or some third party it selects. This money will be used to pay the creditors when they agree to settle your debt. If successful, after several months of negotiations – it may take up to a year – the settlement is reached. The creditors, and usually the debt settlement firm, are paid from the account you created at the beginning of the process.

What’s the Problem?

According to federal agencies and lawmakers and others, the “typical” deal outlined above isn’t all that typical. In fact, it rarely goes so smoothly and even more rarely do consumers get the promised relief.


Back in 2009, the FTC became wary of the rise in debt settlement companies. It was particularly concerned about the upfront fees charged to customers, which often amounted to thousands of dollars. It proposed some new rules to:

  • Bar these companies from charging fees until after they’ve actually performed services for their clients
  • Make the Telemarketing Sales Rule (TSR) apply to calls made from consumers to debt settlement companies in response to advertisements they see or hear. Under the TSR, companies can’t make outlandish claims of success rates of their products or charge upfront fees
  • Require companies to explain in advance how the settlement process works, how long it will take, and how much it will cost

As of May 2010, the FTC is still working on passing the new rules. However, things aren’t standing still.

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