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 Connecticut, debt settlement companies are regulated under both state and federal laws. These companies negotiate with creditors to let consumers pay a reduced amount to settle their debts. Consumers are typically asked to save a specific amount monthly in an account until enough funds are accumulated to pay off a negotiated settlement. However, there are risks involved, such as the possibility of failing to save the required funds, creditors not agreeing to the settlement, and potential negative impacts on credit reports. Additionally, consumers may face continued collection efforts or even lawsuits from creditors. The Federal Trade Commission's Telemarketing Sales Rule (TSR) prohibits debt settlement companies from charging fees before settling debts and requires them to provide clear information about the risks and potential consequences of their programs. In Connecticut, consumers should be cautious of debt settlement scams and companies that charge upfront fees, guarantee debt elimination, or advise stopping communication with creditors without explaining the consequences. It's important for consumers to thoroughly research and consider the implications before enrolling in debt settlement programs.