Settling Your Credit Card Debts : Debt Settlement Companies

Editor Debt-Credit Consolidation October 18, 2023

Settling Your Credit Card Debts

If you’ve maxed out your credit cards and are getting deeper in debt, chances are you’re feeling overwhelmed. How are you ever going to pay down the debt? Now imagine hearing about a company that promises to reduce – or even erase – your debt for pennies on the dollar. Sounds like the answer to your problems, right?

The Federal Trade Commission (FTC), the nation’s consumer protection agency, says slow down, and consider how you can get out of the red without spending a whole lot of green.

Debt Settlement Companies

Many different kinds of services claim to help people with debt problems. Among them are “debt settlement” companies that say they’ll negotiate with your creditors to reduce the amount you owe. Some debt settlement companies claim that they can arrange for your debt to be paid off for less than the amount you owe – for anywhere from 30 to 70 percent of the balance. For example, if you owe $10,000 on a credit card, a debt settlement company may claim it can arrange for you to pay off the debt for less, say $4,000.

But there is no guarantee that debt settlement companies can persuade a credit card company to accept partial payment of a legitimate debt. Even if they can, you must put aside money for your creditors each month. Meanwhile, it may be months – or even years – before the debt settlement company negotiates with your credit card company to settle your debts. And, if you stop making your payments in the meantime, the credit card company usually adds late fees and interest to the debt each month. That can cause your original debt to double or triple.

Researching Companies

If you decide to pay a company to negotiate your debt, do some research before you choose one. Consider other people’s experiences with debt settlement companies. One way to do that is to enter the company name with the word “complaints” into an Internet search engine. Read what others have said. You are making a big decision to spend money that could go toward paying down your debt.

Debt Settlement Fees

Companies that sell debt settlement and other debt relief services by phone cannot charge or collect a fee before they settle or reduce your debt.

If you do business with a debt settlement company, you may be required to deposit money for the company’s fees and potential settlements in a dedicated bank account, which will be administered by an independent third party called an account administrator. The account administrator may charge you a reasonable fee, and is responsible for transferring funds from your account to pay your creditors and the debt settlement company when settlements occur – as long as:

• the account is at an insured financial institution;
• you own and control the funds (and any interest accrued), and can withdraw them at any time;
• the debt settlement company doesn’t own, control or have any affiliation with the account administrator;
• the debt settlement company doesn’t split fees with the account administrator; and
• you can stop working with the debt settlement company at any time without paying a penalty. If you decide to end the relationship with the company, it must return the money in the account to you within seven business days – minus any fees the company legitimately earned.

Disclosure Requirements

The debt settlement company must give you information about the program before you enroll:

• Fees and terms. Before you sign up for the service, the company must explain its fees. If the company charges a specific dollar amount for services, it must tell you what it is. The company can charge you only a portion of its full fee for each debt it settles. For example, say you owe money to five creditors. The company successfully negotiates a settlement with one of your creditors. The company can charge you only a portion of its full fee at this time because it still needs to successfully negotiate with four other creditors. Each time the debt settlement company successfully settles a debt with one of your creditors, the company can charge you another portion of its full fee. If the company’s fees are based on a percentage of the amount you save through the settlement, it must tell you both the percentage it charges and the estimated dollar amount that it represents. This may be called a “contingency” fee. The company also must tell you about any conditions on its services. For example, if it has a refund policy, it must tell you the terms and conditions for getting a refund. If the company has a no-refund policy, it must tell you so before you enroll.
• Results. The company must tell you how many months or years it will be before the company will make an offer to each creditor.
• Offers. The company must tell you how much money or what percentage of each outstanding debt you must save before it will make an offer to each creditor.
• Non-payment. If the company asks you to stop making payments to your creditors – or if the program relies on you not to make payments – the company must tell you about the possible negative consequences of doing so, including:
  • damage to your credit report and credit score;
  • your creditors may sue you or continue with the collections process; and
  • your credit card companies may charge you additional fees and interest, which will increase the amount you owe.

Tax Consequences

Depending on your financial condition, the money you save by using debt settlement companies can be considered taxable income. Credit card companies and others may report debt settlements to the IRS, and the agency may consider it income, unless it finds you are “insolvent.” You are insolvent when your total debts are more than the fair market value of your total assets. It can be complicated to determine whether someone is insolvent. If you’re not sure whether you qualify for this exception, talk to a tax professional.

Red Flags

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
• tells you it can stop all debt collection calls and lawsuits
• guarantees that your unsecured debts can be paid off for just pennies on the dollar