Debt Settlement

Debt settlement is when a company, or you yourself, negotiates with creditors to accept a lump sum that is less than what you owe. Commercial debt settlement programs typically tell customers to stop paying their unsecured creditors, such as credit card companies, and instead deposit money each month into a dedicated account. Once enough builds up, the company tries to negotiate a settlement on each debt.

The approach carries real risks. While you stop paying, late fees and interest keep growing, your credit scores usually drop, and creditors can sue you. Forgiven debt may also be treated as taxable income. The FTC warns that only scammers guarantee they can settle all your debts.

Federal rules limit how these companies get paid. Under the FTC's Telemarketing Sales Rule, 16 C.F.R. 310.4(a)(5), a debt relief company that sells its services by phone cannot request or receive any fee until it has actually settled or changed the terms of at least one of your debts and you have made at least one payment under that agreement. The fee must be tied to that specific debt, and money in your dedicated account must be held at an insured financial institution, stay yours, and be returned if you leave the program.

Debt settlement companies face class actions alleging they collected fees too early, misrepresented savings, or promised better credit in violation of the Credit Repair Organizations Act. If you are in a program, keep your contract, account statements, and every fee charged. See our debt relief lawsuits page and how to cancel a debt settlement program.