- You have control over your debt settlement program savings account.
- You must authorize withdrawals from the account.
- The CFPB regulates debt settlement trust accounts, protecting consumers from unscrupulous companies.
Successful participation in a debt settlement program requires you to redirect a portion of your regular monthly debt payments into a savings account. The more consistently you make contributions, the faster you become debt-free. The savings balance’s growth allows you to make a lump-sum payoff or a series of monthly payments once the company reaches a settlement with your creditor.
Where the Myth Comes From
When you face financial hardship, losing money to theft or a scam can be a real fear, and some consumers worry about who controls the program savings account. Can the debt settlement company take your money without paying off creditors?
The reality is that laws protect consumers and give you full control over the program savings account’s money.
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What Happens to Funds Deposited with a Debt Settlement Company?
At the time of enrollment, you decide which accounts to include in the program and commit to a set monthly contribution that will eliminate debts within a given time frame. The company determines your settlement estimates based on an algorithm that includes experience with your creditors, the discounted payoff each creditor generally accepts, and the account’s enrollment balance.
The contributions you make into the trust savings account grows until the debt settlement company can negotiate a lower payoff with one or more creditors. The process typically takes 24 to 48 months, depending on the consistency of your monthly contributions and your creditors’ willingness to settle the debt for less than the full balance.
Legal Requirements for the Debt Settlement Program Savings Account
The CFPB (Consumer Financial Protection Bureau) requires companies to place monthly contributions in a dedicated savings account set up as a trust or IOLTA. The escrow will hold funds that will later pay for the settled debt and any fees charged by the debt settlement company.
The account stipulations include the following:
- The company must deposit funds in an insured account at a third-party financial institution.
- You own the funds plus any interest received.
- You may withdraw money without penalty.
- You control account withdrawals.
- The debt settlement company cannot receive referral fees for opening consumer accounts.
Debt settlement companies use either a third-party trust account or IOLTA account to hold monies until you are ready to settle a debt. You retain account control at all times.
How Trust Accounts or IOLTA account s work?
A person or group manages a trust account for the benefit of someone else. In the case of debt settlement, the company arranges for deposits and withdrawals using a third-party financial institution to ensure the protection of your assets. The company has a fiduciary duty to act in your best interest. IOLTA accounts are trust accounts frequently used by attorneys that serve the same purpose.
While you retain control over the funds, the trust account also prevents creditors from seizing funds held in the account, further protecting your deposits.
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How Debt Settlement Companies Pay Creditors
Once the debt settlement company negotiates an agreement with a creditor, you receive a payoff proposal for approval. You review two separate contracts. The first authorizes the debt settlement company to withdraw funds from your program savings account based on the proposed payment schedule. The second authorizes the payment of program fees due for settling the debt.
What Happens When You Finish or Exit the Program?
Leaving debt settlement can occur when you complete the program, your financial circumstances improve, or your finances deteriorate, and you can no longer make the monthly contributions. When this happens, the company will send you any remaining balance in your savings account.
How does a debt settlement savings account work?
Payments made through a debt settlement program are held in a trust account at a third-party institution or in an attorney trust account. You retain control over all funds and must approve withdrawals to pay creditors or debt settlement program fees.
What agencies regulate the debt settlement industry
The CFPB, FTC, and state attorney generals are the primary agencies that oversee the debt settlement industry.
Do I control funds deposited into a savings account through a debt settlement program?
Yes. You maintain control over withdrawals made on the savings account and must approve settlements and any monthly payments associated with the negotiated payoff.