The debt relief industry has been growing in recent years, and debt settlement companies, also known as debt relief or debt adjusting companies, have been a part of that growth.
There are “legitimate” debt settlement companies, and most states require these companies to carry licenses. While they must abide by industry regulations meant to protect consumers, hiring a debt settlement company can be incredibly risky and far more expensive than other debt management options.
The Risky Business of Debt Settlement
When you settle your debt, you make an agreement with your creditor or debt collector to pay off debt for less than what you owe. You can negotiate a settlement for yourself or hire a debt settlement company to negotiate for you, but it’s a lot safer to go it on your own.
Here’s why debt settlement companies are considered risky:
- They can’t guarantee the outcome of a negotiation since your creditors may refuse to work with them.
- They generally charge a monthly fee for up to four years before attempting to negotiate.
- If you stop making payments on your debt, which is what they usually advise, you’ll accrue late fees and penalty interest charges and could even face lawsuits from creditors.
- You’ll likely see a severe, negative impact to your credit scores.
- Any forgiven debt greater than $600 is considered taxable income.
In short, the end-result after years of working with a debt settlement company is often more debt, worse credit scores and sometimes even wage garnishments from creditors who sue to collect the overdue debt.
Your Debt Relief Alternatives
Depending on how much you owe and your current status with your creditors, you may have other debt relief options. Settling debt on your own could be the right choice under these circumstances:
- You’re already behind on debt payments or your debt is in collections.
- You don’t qualify for your creditor’s debt relief options or for nonprofit debt relief programs.
- You can afford to make a lump-sum settlement of around 50% of what you owe.
- You’ve ruled out bankruptcy as a solution.
Alternatively, consider nonprofit credit counseling, which connects you with a financial counselor who reviews your situation and offers free or low-cost advice on debt repayment strategies.
Choose Wisely
Hiring a third-party debt settlement company is not recommended. If you do decide to go this route, do your research on the debt settlement company first. Here’s what you can look for:
- Online customer reviews and complaints
- Better Business Bureau rating
- State attorney general records
- Enforcement actions from consumer protection agencies like the CFPB
You can also check the Federal Trade Commission’s list of companies and people banned from debt relief and check to see if the company meets your state’s licensing requirements. Even if you don’t come up with any negative information, be aware of red flags such as upfront fees and refusal to provide you with a written agreement.