Myth: Debt Settlement Companies Are Unreliable

Key Takeaways
  • Debt settlement is a mature industry that helped clients settle over 900,000 accounts in 2018, achieving a total savings of 1.6 billion (the latest figures available).
  • Debt settlement is highly regulated with oversight from the FTC, CFPB, and each state attorney general.
  • Legal protections require the transparency of company policies, success rates, and fees.

According to the American Fair Credit Council, In 2018, the debt relief industry contributed $4.9 billion to the economy. Debt settlement companies also helped consumers settle over 900,000 accounts to achieve a total savings of $1.6 billion in that same year.

Settling debt can be a reliable alternative to bankruptcy, provided you can contribute something to debt elimination each month. It can also be more affordable than a credit counseling debt management program because you do not pay all debts in full. Debt settlement saves money by negotiating lower payoffs through a professional agency.

Debt Relief Regulations Protecting Consumers

Debt relief is one of the most highly regulated industries with oversight from the CFPB (Consumer Financial Protection Bureau), FTC (Federal Trade Commission), and state attorney generals.

Legislative action like the FDCPA (Fair Debt Collection Practices Act) and the TSR (Telemarketing Sales Rule) apply specifically to debt collections and debt relief providers. These laws put consumer protections in place along with restrictions on communications and required disclosures.

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Consumers Protections and Required Disclosures

FTC rulings require debt settlement companies to provide honest and transparent information about their services. Companies cannot guarantee upfront that every creditor will settle the debt for pennies on the dollar, that a creditor will not bring legal action, or that a creditor will accept a certain reduced payoff amount.

Companies must educate enrolled clients of the potential consequences of missed payments, including a decline in your credit score and the possibility that a creditor might bring legal action against you. Required disclosures also include details about program costs, estimated savings, and charges associated with the program savings account.

The following required disclosures must provide data based on the companies track record. Success rates must include the experiences of all clients, not just the most successful ones.

  • An estimate of the time it takes to get your first settlement.
  • The estimated time required complete the program.
  • Estimates of potential financial savings.
  • The amount of money required before you can successfully settle a debt.

The Management of Trust Accounts

Debt settlement companies must place monthly payments made for future debt payments into a qualified trust account, or dedicated savings account managed by an insured third-party financial institution. The debt settlement company cannot have any affiliation or receive referral fees from the financial institution.

You retain ownership of all funds plus any accrued interest on the account and control withdrawals. Once the company reaches a settlement, you must approve the payment schedule to your creditor and authorize the payment withdrawals along with any associated debt management fees.

The bank (or debt management company) cannot charge a penalty for withdrawals, even if you exit the program.

Relationships with Creditors

Technology plays a large role in the debt collection process. Creditors and debt collectors use AI and investigative skills to determine which delinquent accounts are more likely to pay. Owning assets, having a steady income, or living in a state that allows wage garnishments can mean more aggressive collection efforts on the part of creditors.

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Debt settlement companies have a working relationship with creditors giving them industry expertise. The company has a record of previous settlements, the level of discount achieved, and knows which creditors have a higher propensity to sue. Creditors will often delay legal action on an account enrolled in debt settlement because debt settlement offers a better chance of receiving some payment without the expense of court proceedings.  Utilizing the expertise of a debt settlement company can help you achieve the lowest possible settlement.

  • Are debt settlement companies legitimate?

    The debt settlement industry is highly regulated. Companies must provide client disclosures that represent the company’s experience providing debt relief for all clients, not just the best cases.

  • How can I tell if the debt settlement company is legitimate?

    You can verify the companies state license. You might also check customer complaints at the Better Business Bureau (BBB), CFPB (Consumer Financial Protection Bureau (CFPB), or the state attorney general’s office. Companies like Trustpilot provide a source for customer reviews, not just complaints.

  • Is debt settlement a good option?

    Hiring a company to negotiate delinquent debts can relieve stress and pressure when you have a hardship that causes financial distress. If you can pay something toward your outstanding debts each month but not enough to pay the balances in full, debt settlement could provide the debt relief you seek.