If you’re comparing debt settlement companies, you’re making a decision that will affect your finances and your credit for years. Most companies sound similar on the phone, so the best way to tell them apart is to ask direct questions and know which answers should worry you. Here are the questions to ask, the warning signs to watch for and the rules legitimate companies follow.
How Debt Settlement Companies Work
A debt settlement company negotiates with your creditors to accept less than the full balance on unsecured debts such as credit cards, medical bills and personal loans. You typically deposit money each month into a dedicated account that you own and control. Once enough has built up, the company negotiates a settlement with one creditor at a time and pays it from that account. Programs often take two to four years. Learn how long debt settlement takes.
The Rule Every Legitimate Company Follows
Under the Federal Trade Commission’s Telemarketing Sales Rule, debt settlement companies that sell their services by phone generally can’t charge any fees until they have settled at least one of your debts and you’ve made at least one payment under that settlement. A company that asks for money upfront, before it has settled anything, is a major red flag. See how debt settlement fees work.
10 Questions to Ask Before You Sign
- What are your total fees, and when exactly do I pay them? Fees are commonly a percentage of the debt enrolled or the amount saved. Get the number in writing.
- Do you charge anything before a debt is settled? The answer should be no.
- Who owns and controls the dedicated account? It should be in your name, at an independent institution, and you should be able to withdraw your money.
- Are you licensed in my state? Some states require licensing or registration, and a few restrict debt settlement entirely.
- Which of my debts qualify? Secured debts such as mortgages and car loans, and most federal student loans, generally can’t be settled this way. See which debts can be settled.
- How long will the program take, and what monthly deposit does that assume?
- What happens if a creditor sues me during the program? Ask whether they work with attorneys and how they handle lawsuits. See what to do if a debt collector sues you.
- Can I cancel at any time, and what happens to my money if I do?
- How will this affect my credit and taxes? An honest company will explain both clearly. See how settlement affects your credit.
- Are you a member of an industry association? Memberships such as the IAPDA mean a company has agreed to industry standards. They’re a good sign, but not a guarantee.
Red Flags to Watch For
- Upfront fees before any debt is settled
- Guarantees to cut your debt by a specific percentage, or to stop all lawsuits
- Pressure to sign immediately
- Telling you to stop talking to your creditors without explaining the risks
- Claims of a “new government program” to erase credit card debt
- Vague answers about fees, timelines or who holds your money
Learn more about common debt settlement scams.
Check a Company’s Track Record
Look up complaints with the Consumer Financial Protection Bureau, your state attorney general and the Better Business Bureau. Read reviews on more than one site, and look for patterns rather than single complaints.
Consider Your Other Options Too
Debt settlement isn’t right for everyone. Depending on your situation, credit counseling, a consolidation loan, settling on your own or bankruptcy may fit better. Compare them in Debt Consolidation vs. Debt Settlement and Debt Settlement vs. Credit Counseling.
Frequently Asked Questions
How much do debt settlement companies charge?
Fees vary, but they’re commonly a percentage of the enrolled debt, often somewhere in the 15% to 25% range. Get the exact fee in writing before you enroll.
Is it illegal for a debt settlement company to charge upfront fees?
For companies covered by the FTC’s Telemarketing Sales Rule, which includes most that sell by phone, yes. They generally can’t collect fees until they’ve settled a debt and you’ve made a payment under that settlement.
Can I settle debt without a company?
Yes. Many people negotiate directly with their creditors. Here is how to settle debt yourself.
Related reading: What to Do When Your Debt Is Sent to Collections · How Much Will Credit Card Companies Settle For?
Ask Us These Questions
We welcome every question on this list. Alliance Settlement works with clients nationwide and will walk you through our fees, timeline and process before you commit to anything. Get a free consultation.
This article is general information, not legal or financial advice.
