What Is Debt Settlement?

Many consumers who have out of control debt will at one time or another consider a debt settlement program as a solution. These programs are somewhat controversial for a variety of reasons. Knowing more about debt settlement, how it works and how debt settlement companies operate, will help you decide if debt settlement is right for you. 

What is a debt settlement program?

Debt settlement programs are run by companies and organizations that negotiate settlements with creditors on behalf their clients. Debt settlement programs are supposed to help people who owe money to eliminate their debts so they can begin rebuilding their credit. 

How do debt settlement programs work?

The person in debt makes regular payments to an escrow-like savings account managed by the debt settlement company. Once these payments begin to accumulate, the settlement program begins to negotiate away the debt. 

Why would a creditor agree to negotiate a debt settlement?

When the person signs up for the program, that person is encouraged or instructed by the debt settlement company to stop making payments to their creditors. Creditors are more likely to negotiate when they think that the alternative is to get nothing. 

Do these programs work? What are the risks?

The success of these programs is unclear at best. The FTC reports that many (or most) people who enroll in these programs drop out without accomplishing the goal. In addition to the risk that the program may not work, there are other negative consequences to signing up for debt relief. These consequences include

  • Debt settlement programs can ruin the credit of the person who signs up, because that person stops paying creditors. 
  • Some debt settlement programs pay themselves before settling their clients' debts, and when the clients drop out of the program, all the money put into the program is simply lost.
  • Some companies write into the contract that if a single payment is missed, the contract is terminated and the company gets to keep the money. 
  • Successful debt settlement is treated like income by the government and is therefore taxable.
  • Up to 10% of people enrolled in debt settlement programs are sued by their creditors while enrolled in their debt settlement programs.

Debt settlement programs can involve great risks for the consumer. People straddled with debt who are seeking solutions should seek legal advice before committing themselves to a debt settlement program. For more advice about eliminating debt, contact a bankruptcy attorney like Reppe Law Office in your area.