What You Need to Know About Debt Settlement Companies

Every day seems to bring more bad news --- job layoffs, foreclosures, business failures.  More families in our own communities are having trouble making ends meet.  Unfortunately, this makes people vulnerable to opportunists who promise quick fixes.   

Beware of advertisements that sound too good to be true.  They make claims like "reduce what you owe by up to 70%," or "be completely debt free in as little as 12 months," or "we can get you out of debt in months instead of years."  Perhaps they can in some cases.  But consumers need to know that these debt settlement companies are largely unregulated and charge significant fees --- most of which are collected up front regardless of whether the consumer settles any debt at all.

At a Federal Trade Commission (FTC) workshop investigating debt settlement, Travis Plunkett of the Consumer Federation of America called debt settlement "a very murky industry that often can't deliver what it promises."  Some banks state that debt settlement companies are unable to negotiate deals that are any better than those a consumer could negotiate on their own. 

If you stop paying your creditors while saving for a settlement, your debt may continue to grow if interest and fees continue to be charged by your creditors.  Even worse, your creditors may take legal action against you.  It is not uncommon for debt settlement fees to total thousands of dollars.  And, if any debt is actually settled, you will likely owe income taxes to the IRS on the forgiven amount.    

J. Thomas Rosch, the Commissioner of the FTC, recently said he is "concerned about certain practices we've witnessed among some industry players."  He said the FTC has sued seven debt settlement companies so far, and "In all of these cases, the defendants allegedly made false or unsubstantiated claims about the program benefits --- specifically, that their programs would enable consumers to pay off all of their unsecured debt for a reduced amount; that consumers would be debt-free in 18-30 months; and that debt collection calls would cease.  These claims are particularly astonishing in cases where the defendants apparently contacted few, if any, of the consumers' creditors."  He went on to offer suggestions for improving the debt settlement industry:

• Debt settlement firms should limit their performance claims to those they can adequately substantiate. 
• Ads should not misrepresent the benefits of debt settlement.
• Ads should disclose the negative impact that participation in a program may have on a consumer's credit score.
• Debt settlement firms shouldn't be allowed to charge any payment in advance of performing services.
  

If you are considering debt settlement, you need to do your homework.  Insist on full disclosure of all fees, tax implications, possible legal actions, and impact to your credit report. 

NFCC Press Release on Debt Settlement - May 11, 2009

New York Announces Nationwide Investigation Into Debt Settlement Industry - May 7, 2009

Texas Attorney General Sues Debt Settlement Company - March 26, 2009

Consumer Bankers Association - Statement on Debt Settlement - December 1, 2008