Maybe you’ve seen the signs on the side of the road, or you’ve gotten solicitor calls or brochures in the mail that promise to “Settle your credit card debt” or “Eliminate debt now!” The offers are tempting – but are they legitimate? Unfortunately, in some cases, the answer is no. Not only may these claims be dishonest, some are simply scams, trying to take advantage of desperate people.

The term settlement comes from the idea that the creditor agrees to “settle” your account, and also generally includes the closing of the account.

Is debt settlement ever a legitimate and viable option? Yes, but only in certain conditions, and it can cause potentially negative effects to your overall monetary situation and credit score (see the potential risks and pitfalls that follow.) Each creditor’s policy on account settlement varies, and it is always a creditor’s right to dictate their own terms. Determining factors may include the total amount of debt owed, the length of time an account has been active, the length of time the account has been delinquent, along with other criteria.

Do-It-Yourself Debt Settlement

A commonly unknown but important fact is this: There is nothing a debt settlement provider can do to help you that you can’t do yourself. While they may claim to know legal secrets, or have special relationships or concessions with creditors, they don’t. There are no magic tricks, loopholes or other methods they can legally provide.

But they still get plenty of customers. And when debt settlement agencies contact and negotiate with creditors on behalf of consumers, essentially becoming the “middle man,” is when people are at risk. The problem has become so prevalent that state officials have begun stepping in to protect consumers.

1. Debt Settlement Fees

Many debt settlement providers charge high fees, sometimes $500-$3,000, or more. But these fees are not applied to your debt – they go straight into the agencies’ pockets.

2. Debt Settlement Impact On Credit Score

While not as devastating as a bankruptcy, a debt settlement will have a negative impact on your credit score, even if you work directly with your creditors, as the settlement may be reported by the creditor to each of the three leading credit bureaus. This will in turn affect your future loan terms, credit availability, employment opportunities, and more.

3. Holding Funds

Here’s one debt settlement scenario some consumers have reported experiencing: A provider requires you to give them a large lump sum, earmarked for debt repayment, which they hold in escrow for months or even years, telling you they need the time to “negotiate” with your creditors, while they make little or no progress on your case – they simply hold your cash, which you could be using for better things. Worse, they may refuse to return the money, if you’ve signed anything giving them rights to it (even if you didn’t realize you had).

4. Debt Settlement Tax Implications

If a creditor agrees to settle your debt in exchange for a reduced payment, you may still be responsible for paying taxes on the reduced debt. Basically, if the settlement results in a debt reduction of $600 or more, the creditor is required to notify the IRS. For example, if you owe a creditor $10,000 and they agree to settle with you for a one-time payment of $7,500, the reduced amount, $2,500 may be included as part of your taxable income.

The bottom line: If it sounds too good to be true, it probably is. Be smart: Don’t fall victim to misleading claims or pay money for something you may be able do yourself. And never sign anything you don’t fully understand. It’s your money – and your responsibility!

We’ve included some debt relief strategies that you can begin on your own – and they don’t cost a dime – such as:


Depending on your situation, you may have some leverage you can use to negotiate your own debt relief plan. Call your creditors directly and ask them if they will lower your interest rates and/or waive late or over-limit fees to reduce your balances. Creditors are becoming more and more willing to work with customers. Hubert H. Rivera, Vice President of Consumer Outreach at InCharge Education Foundation, a non-profit organization providing financial education and credit counseling nationwide, agrees that “Creditors understand that plenty of us have been through rough economic times and are willing to extend a helping hand – and many times, this help is just a phone call away.”

Credit Counseling

A reputable credit counseling service, like InCharge Debt Solutions, can help you find a solution that fits your personal financial situation. These non-profit agencies offer free credit counseling sessions, which include a budget evaluation, online, via phone or face-to-face. They assess your total financial picture to make recommendations accordingly, and guide you towards a customized solution. A credit counseling service may be able to help you pay off your debt through debt management, a bill consolidation program with lower monthly payments, reduced interest and a 3-5 year commitment.

Credit counseling is a viable option for thousands of consumers that can help them avoid bankruptcies, wage garnering and judgments. In fact, leading creditors have recently banded together to begin offering hardship plans that allow consumers to pay more affordable percentages of their total balances, which also includes lowering interest rates, so debts can be repaid within 3-5 years. Alternative options, such as referrals to social service organizations, or legal assistance, may also be offered.