- Debt settlement companies operate under the same basic structure. You make monthly contributions to a program savings account. After saving balances grow, the company negotiates a settlement for less than the full balance.
- As with any industry, there are ethical and non-ethical companies offering debt settlement services.
- Agencies like the BBB and CFPBrate companies based on customer service and complaint histories. These records can help you identify an ethical company.
- The AFCC sets industry standards and can help you find companies that follow industry best practices.
In 2010, Congress increased industry oversight by amending the Telemarketing Sales Rule (TSR), giving new guidance regarding contact and communication with consumers along with acceptable fee structures. In November 2020, the Consumer Financial Protection Bureau (CFPB) issued a final ruling that added additional clarification on debt collector communications and electronic contact. The ruling gives consumers more control over debt collection contacts.
Debt relief, including debt settlement, is a highly regulated industry with consumer protections that seek to prevent abusive and unfair debt collection practices. But like any industry, not all debt settlement companies treat customers with respect, operate with integrity, and pursue debt settlement arrangements that are most beneficial to their clients.
Before choosing a debt settlement company, consider the following factors:
Do You Qualify for Debt Settlement?
To settle debt, you must earn enough income to cover your living expenses plus some extra funds for debt elimination. When you consistently fund your program savings account, you will accumulate balances you can use to pay off your debt for less than the full balance.
You could save between 20% and 80% of the current balances, but debt settlement requires you to pay a portion of what you owe. Through the program, you could become debt-free in 24 to 48 months.
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Does Your Debt Qualify?
Debt settlement companies do not work with every creditor or every type of debt. In general, you can negotiate unsecured debts such as credit cards, personal loans, payday loans, medical debts, and sometimes private student loans.
Some companies have minimum debt requirements for either the total debt enrolled or per account. Other companies specialize in working with certain types of debt.
What Will It Cost You to Enroll in Debt Settlement?
You do not pay an upfront fee to enroll accounts in a debt settlement program.
Companies typically charge either a percentage based on the account balance at enrollment or based on the debt reduction achieved. You might also pay a small monthly fee for the program savings account or administrative fees.
Companies can receive accreditation through the American Fair Credit Council (AFCC) or the International Association of Professional Debt Arbitrators(IAPDA). You can also check the companies Better Business Bureau (BBB) rating or the complaint database with the CFPB (Consumer Financial Protection Bureau).
Does the Company Have Transparent Policies?
Companies with integrity understand that debt settlement is not the best solution for every consumer. Does the financial counsel or discuss both the pros and cons of debt settlement and advise on ways to protect your finances and your credit score? Do they present debt settlement as having no downside and a fast and easy way to get out of debt, or do they take a more nuanced approach giving you a realistic description of the process and timeline?
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Debt settlement can be the best solution for consumers who face a financial hardship that prevents you from paying 100% of your existing debts. The process requires a certain amount of financial discipline and will negatively impact your credit score in the short term. However, when you follow the program as recommended, you could become debt-free within four years and could save thousands of dollars by paying less than the full balances you currently owe.
How much do debt settlement companies charge to negotiate debt?
Debt settlement companies typically charge between 15% and 25% of the enrolled debt. Companies may also charge fees based on the reduced settlement amount.
Will I actually save money through debt settlement?
Debt settlement companies can save you between 20% and 80% of the enrolled balances plus fees paid to the company for their services.
How do I find an ethical debt settlement company?
The AFCC sets industry standards and has members who adhere to those standards. The Better Business Bureau and the CFPB also maintain complaint databases, which can help you gauge previous customers’ experience.