Debtor and Creditor

Debt Settlement Offers Are They Scams

  • 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.


In April 2010, the Government Accounting Office (GAO) delivered a report to the US Senate. It outlines how many for-profit debt settlement companies are posing serious risks to consumers by using fraudulent, abusive or deceptive tactics. For example, many companies are:

  • Charging high up-front fees before providing any services and sometimes providing no services at all
  • Telling consumers to stop paying creditors during the negotiation process, which not only increases the amount of their debt (though interest and late fees), but makes consumers open to lawsuits by creditors
  • Exaggerating their success rates and the amount of time it takes to reach settlements

US Senate

In April 2010, two US Senators proposed a new law, the Debt Settlement Consumer Protection Act. If it becomes law, debt settlement firms will have to give consumers written explanations of its services before it charges any fees. It will also limit the amount and type of fees that may be charged and makes violators liable for fines and other penalties.

What You Can Do

Today's economy has many US families struggling with debt. If you're looking for help, consider these steps:

  • First, talk to your creditors. Many times, you can work out a payment plan that fits your budget
  • Contact a reputable, licensed non-profit credit counselor. She can help you manage your finances and come up with a budget to help you get out of debt

If you're still interested in debt settlement, you should:

  • Before you agree to pay for their services, get detailed information in writing about fees, how long it will take and what happens to money you pay if you later change your mind
  • Avoid companies charging high up-front fees, claiming "100 percent success rates," or claiming they can get you debt free in a few weeks or months
  • Continue paying your creditors during the negotiation process
  • Call your creditors periodically during the settlement process and ask if the settlement firm is actively working on your case
  • Understand debt settlement most likely will have a negative impact on your credit rating
  • Understand you may have to pay taxes on the amount of debt your creditors agree wipe out in the settlement
  • If you suspect a firm isn't working on your debts as promised, file a complaint with the FTC and your state attorney general

Offers to get out of debt quickly and easily are tempting if you're struggling to make ends meet. There is help out there. Just make sure you choose the right help.

Questions for Your Attorney

  • Is it better to file bankruptcy than try to settle my debts?
  • A debt settlement firm won't return thousands of dollars of my money it's holding in an escrow account. Can I get it back?
  • Will my wife's credit rating be affected if I settle my debts? Should we both settle our debts?
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