Does Debt Settlement Make Sense For You?

Despite the fact that there is not much federal regulation, and the process can decimate a person's credit rating, the debt settlement industry has a strong attraction for troubled borrowers who want to avoid bankruptcy.

Sometimes confused with debt consolidation, where borrowers are offered one big loan to pay off their smaller debts, or with credit counseling, where agencies attempt to set up low-interest repayment plans so borrowers can pay off credit card debt over time, debt settlement is a very different procedure. Rather than arranging a loan or other type of repayment plan, debt settlement companies usually recommend that their clients to stop paying their bills in order to save up cash, which will then be used to pay lump-sum settlements on your outstanding debt.

While this sounds quite attractive, people considering a program to settle credit card debt have several important factors to consider:

• Debt settlement will severely damage your credit score.


• The IRS generally considers the difference between what you owe and what you pay to settle debts taxable income.


• The lack of regulation in the debt consolidation and settlement industry requires a diligent buyer-beware attitude.


• Be prepared to pay a percentage of the total face value of your debt as a fee to the settlement company - typically 14% to 18%.


• The debt settlement process can take up to three years, with the average being approximately 24 months.

So where should you begin?

If you decide that credit card debt settlement is the right choice for you, you should start out with a bit of research. Because of the lack regulation, you will need to choose your debt settlement company carefully.

However, the FTC does offer some suggestions in this area. Look for a debt settlement company that meets the following criteria:

• Does not guarantee any results.


• Will not accept you if you can actually pay your debt.


• Has written policies and procedures about their debt settlement program.


• Is a member of the Better Business Bureau.


• Has a customer-dispute resolution and review process.


• Has in-house attorneys with significant experience in credit industry compliance.


• Handles clients in-house, rather than referring them to a third party.


• Fully discloses all program fees and costs before the start of the debt settlement program.


• Informs clients that the IRS considers any forgiven debt above $600 as taxable income.


• Requires prospective clients to commit to saving money to fund settlements.


• Negotiates on an ongoing basis with creditors and presents all settlement offers to the customer for his or her exclusive approval.

Warning signs to watch for

Be alert; any of the following should raise some definite red flags:

• The company isn't a member of TASC. The largest association in the debt settlement industry, The Association of Settlement Companies has strict standards that are voluntarily followed by all of its members.


• Fees aren't based on results. Be vary wary of companies that attempt to collect money up front.


• Counselors are paid on commission. This practice can serve to increase the chances that counselors will lie to get you in their program.


• Inexperience. With the current economic downturn, and increasing numbers of debtors considering settlement as a possible solution, many companies have sprung into existence very recently and have therefore have little experience successfully negotiating settlements. Don't let them practice on you.

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