Debt Settlement Companies

Debt settlement programs typically are offered by for-profit companies, and involve the company negotiating with your creditors to allow you to pay a “settlement” to resolve your debt. The settlement is another word for a lump sum that's less than the full amount you owe. To make that lump sum payment, the program asks that you set aside a specific amount of money every month in savings.

Debt settlement companies usually ask that you transfer this amount every month into an escrow-like account to accumulate enough savings to pay off a settlement that is reached eventually. Further, these programs often encourage or instruct their clients to stop making any monthly payments to their creditors.

Debt Settlement Has Risks

Although a debt settlement company may be able to settle one or more of your debts, consider the risks associated with these programs before you sign up:

1. These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all (or even some) of their debts settled. They drop out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.

2. Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. So there is a chance that your debt settlement company will not be able to settle some of your debts—even if you set aside the monthly amounts the program requires. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to grow.

3. Because debt settlement programs often ask—or encourage—you to stop sending payments directly to your creditors, they may have a negative impact on your credit report and other consequences. For example, your debts may continue to accrue late fees and penalties that can put you further in the hole. You also may get calls from your creditors or debt collectors requesting repayment. You could even be sued for repayment. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.

Beware of Debt Settlement Scams

Some companies offering debt settlement programs may engage in deception and fail to deliver on the promises they make — for example, promises or “guarantees” to settle all your credit card debts for, say, 30 to 60 percent of the amount you owe. Other companies may try to collect their own fees from you before they have settled any of your debts — a practice prohibited under the FTC’s Telemarketing Sales Rule (TSR) for companies engaged in telemarketing these services. Some fail to explain the risks associated with their programs: for example, that many (or most) consumers drop out without settling their debts, that consumers’ credit reports may suffer, or that debt collectors may continue to call you.

Avoid doing business with any company that promises to settle your debt if the company:

• charges any fees before it settles your debts

• touts a "new government program" to bail out personal credit card debt

• guarantees it can make your unsecured debt go away

• tells you to stop communicating with your creditors, but doesn’t explain the serious consequences

• tells you it can stop all debt collection calls and lawsuits

• guarantees that your unsecured debts can be paid off for pennies on the dollar

In Texas, debt settlement companies are regulated under both state and federal laws. These companies negotiate with creditors to allow consumers to pay a reduced amount on their debts. Texas Finance Code Chapter 394, which is also known as the Debt Management and Settlement Services Act, provides specific regulations for debt settlement services. This includes requiring these companies to be registered with the state, providing clear and detailed disclosures to consumers, and prohibiting the collection of upfront fees before settling a consumer's debts. Additionally, the Federal Trade Commission's Telemarketing Sales Rule (TSR) prohibits debt settlement companies from charging advance fees before they have successfully settled or reduced a consumer's debt. Consumers should be aware of the risks associated with debt settlement, such as potential damage to credit scores, the accumulation of late fees and penalties, and the possibility of legal action by creditors. It's important for consumers to thoroughly research and consider the implications before enrolling in a debt settlement program and to be cautious of companies that make unrealistic promises or violate regulations by charging upfront fees or misrepresenting their services.