How to Cancel a Debt Settlement Program and Get Your Money Back

In most cases, yes. Most debt settlement companies sell by phone, which puts them under the FTC's Telemarketing Sales Rule. That rule lets a company ask you to put money in a dedicated account for future settlements and fees only if five conditions are met (16 CFR 310.4(a)(5)(ii)):

1. The account is at an insured financial institution.
2. You own the funds and are paid any interest the account earns.
3. The company administering the account is not owned by, controlled by, or affiliated with the debt settlement company.
4. The administrator does not pay or accept referral fees involving the debt settlement company.
5. You can withdraw from the program at any time without penalty and must receive all funds in the account, other than fees properly earned, within 7 business days of your request.

If a telemarketed debt settlement company uses a dedicated account, federal rules give you the right to quit at any time and get the balance back within 7 business days. The FTC's consumer guidance says the same thing: the money and any interest are yours, and you may withdraw it any time without penalty.

If the company also sold its debt program as a way to improve your credit, courts have applied the Credit Repair Organizations Act to it, and that law adds a right to cancel the contract within 3 business days of signing, for any reason, in writing (15 U.S.C. 1679e). Our debt relief lawsuits page explains how courts have used CROA against debt settlement programs.

1. Find your contract and account information. Look for the name of the dedicated account administrator (often a payment processor, separate from the debt company), your account number, and any cancellation instructions.
2. Download your account ledger. Before you cancel, save a full history of deposits, fees, and settlement payments. You will need it to check what was taken and when.
3. Send a written cancellation to the debt settlement company. Email and a mailed letter both work; keep copies. Say you are withdrawing from the program, ask that no further fees be charged, and ask for written confirmation.
4. Send the same notice to the account administrator. Ask it to close the account and send the full balance to you, and note the 7-business-day requirement.
5. Stop the automatic draft. Tell your bank you revoke the debit authorization for the monthly deposits. This protects you if a draft is already scheduled.
6. Handle any power of attorney. Some programs, including law-firm programs, have you give the firm a power of attorney or tell creditors to deal only with the firm. Revoke it in writing and let your creditors know you are handling the accounts yourself again.
7. Keep paying any settlement already in progress. If a settlement is being paid in installments, check whether stopping will void it (see the warning below).
8. Follow up on day 8. If the money has not arrived within 7 business days, send a second written demand and file complaints with the Consumer Financial Protection Bureau and your state attorney general.

The Telemarketing Sales Rule decides which fees a company was allowed to take. Since October 27, 2010, a debt relief company selling by phone may not request or receive any fee for a debt until all three of these happen (16 CFR 310.4(a)(5)(i)):

• it has settled, reduced, or changed the terms of that debt under a written agreement you accepted;
• you have made at least one payment to the creditor under that agreement; and
• the fee for that debt is either a proportional share of the total fee, based on that debt's share of all enrolled debt, or a fixed percentage of the amount saved that does not change from debt to debt.

Here is how the proportional method works. Say you enrolled $20,000 of debt and the total fee is 20 percent, or $4,000. If the company settles a $5,000 card, which is 25 percent of your enrolled debt, the most it can charge for that settlement is 25 percent of the total fee, or $1,000, and only after your first settlement payment.

Fees earned on debts that were actually settled under these rules are generally not refundable, but fees taken before any settlement, or out of proportion to what was settled, were collected in violation of 16 CFR 310.4(a)(5) and may be recoverable.

Common examples of fees worth questioning:

• "Enrollment," "setup," or "retainer" fees deducted in the first months before any settlement.
• A large fee taken right after the first settlement that is far more than that debt's share.
• Monthly "legal plan" or membership charges bundled into your deposit.
• Fees charged on a settlement you negotiated yourself.

Small account-maintenance charges from the independent administrator are allowed; the FTC says the administrator may charge a reasonable fee to manage the account.

Canceling the program does not cancel the debts. Here is where each kind of account stands:

• Settled and fully paid debts stay resolved. Keep the settlement letter and proof of payment permanently.
• Debts in the middle of an installment settlement are resolved only if you finish the payments on time.
• Debts never settled are still owed. The CFPB warns that when you stop paying a credit card, late fees and interest are added each month, so the balance may be higher than when you enrolled.

The CFPB also warns that creditors or collectors may sue while you are saving for a settlement, and that can still happen after you leave. If you are sued, respond by the deadline on the summons. If a collector uses abusive tactics or sues on a debt it cannot prove, the Fair Debt Collection Practices Act may help; see our FDCPA guide and debt collection harassment lawsuits.

Your credit reports will likely show the missed payments and charge-offs from the program period. If anything is reported wrong, such as a settled account still showing a balance, you can dispute it for free. See how to dispute a credit report error.

Taxes on forgiven debt

Under IRS rules, debt canceled for less than the full amount owed is generally taxable income in the year it is canceled, and the creditor may send you a Form 1099-C. Exclusions exist, including debt canceled while you were insolvent and debt discharged in bankruptcy. If you got a 1099-C with wrong information, contact the creditor, but you still must report the correct taxable amount.

The CFPB suggests a few alternatives to a for-profit debt settlement company:

• A nonprofit credit counseling agency, which can set up a debt management plan with your creditors and help with a budget.
• Negotiating directly with your creditors or the debt collector. The FTC notes you can call your card company yourself to ask for a lower rate or a payment plan, and that you do not need to pay a company to do it.
• A bankruptcy attorney, some of whom offer a free first consultation, to explain your options under the law.

Whatever you choose, compare costs in writing before signing. The FTC warns that only scammers guarantee they can settle all your debts, and a company that asks for a fee before it settles anything may be breaking the federal advance-fee rule if it sold you by phone.

Once you have your ledger, compare the date of each fee to the date of the first payment on each settlement. Fees that came first may have been taken in violation of the federal advance-fee ban. If the company promised your credit would improve, the Credit Repair Organizations Act may also apply, and it lets you recover at least everything you paid, plus possible punitive damages and attorney fees, within 5 years of the violation.

Attorneys are investigating advance-fee and CROA claims against several debt relief companies; our debt relief lawsuit page lists what has been verified about each one. Do not sign a release for a partial refund until someone has reviewed it. A free case review can connect you with independent attorneys who handle these cases.