Settling Your Credit Card Debts

If you’ve maxed out your credit cards and are 

getting deeper in debt, chances are you’re feeling 

overwhelmed. How are you ever going to pay 

down the debt? Now imagine hearing about a 

company that promises to reduce – or even erase 

– your debt for pennies on the dollar. Sounds 

like the answer to your problems, right? 

The Federal Trade Commission (FTC), the 

nation’s consumer protection agency, says slow 

down, and consider how you can get out of the 

red without spending a whole lot of green.

Debt Settlement Companies

Many different kinds of services claim to 

help people with debt problems. Among them 

are “debt settlement” companies that say they’ll 

negotiate with your creditors to reduce the 

amount you owe. Some debt settlement companies claim that they can arrange for your debt 

to be paid off for less than the amount you owe 

– for anywhere from 30 to 70 percent of the 

balance. For example, if you owe $10,000 on 

a credit card, a debt settlement company may 

claim it can arrange for you to pay off the debt 

for less, say $4,000.

But there is no guarantee that debt settlement companies can persuade a credit card 

company to accept partial payment of a legitimate debt. Even if they can, you must put aside 

money for your creditors each month. Meanwhile, it may be months – or even years – before 

the debt settlement company negotiates with 

your credit card company to settle your debts. 

And, if you stop making your payments in the 

meantime, the credit card company usually adds 

late fees and interest to the debt each month. 

That can cause your original debt to double

or triple. 

October 2010

Companies that sell debt 

settlement and other debt 

relief services by phone 

cannot charge or collect 

a fee before they settle or 

reduce your debt.
Researching Companies

If you decide to pay a company to negotiate 

your debt, do some research before you choose 

one. Consider other people’s experiences with 

debt settlement companies. One way to do that 

is to enter the company name with the word 

“complaints” into an Internet search engine. 

Read what others have said. You are making a 

big decision to spend money that could go toward paying down your debt.

Debt Settlement Fees

Companies that sell debt settlement and 

other debt relief services by phone cannot charge 

or collect a fee before they settle or reduce your 

debt.

If you do business with a debt settlement 

company, you may be required to deposit money 

for the company’s fees and potential settlements in a dedicated bank account, which will 

be administered by an independent third party 

called an account administrator. The account 

administrator may charge you a reasonable fee, 

and is responsible for transferring funds from 

your account to pay your creditors and the debt 

settlement company when settlements occur – as 

long as:

•	 the account is at an insured financial institution; 

•	 you own and control the funds (and any 

interest accrued), and can withdraw them at 

any time; 

•	 the debt settlement company doesn’t own, 

control or have any affiliation with the account administrator; 

•	 the debt settlement company doesn’t split 

fees with the account administrator; and 

•	 you can stop working with the debt settlement company at any time without paying a 

penalty. If you decide to end the relationship 

with the company, it must return the money 

in the account to you within seven business 

days – minus any fees the company legitimately earned.

Disclosure Requirements

The debt settlement company must give 

you information about the program before you 

enroll:

•	 Fees and terms. Before you sign up for the 

service, the company must explain its fees. 

If the company charges a specific dollar 

amount for services, it must tell you what it 

is. The company can charge you only a portion of its full fee for each debt it settles. For 

example, say you owe money to five creditors. The company successfully negotiates a 

settlement with one of your creditors. The 

company can charge you only a portion of 

its full fee at this time because it still needs to 

successfully negotiate with four other creditors. Each time the debt settlement company 

successfully settles a debt with one of your 

creditors, the company can charge you another portion of its full fee.

If the company’s fees are based on a percentage of the amount you save through the 

settlement, it must tell you both the percentage it charges and the estimated dollar 

amount that it represents. This may be called 

a “contingency” fee.

The company also must tell you about any

conditions on its services. For example, if it 

has a refund policy, it must tell you the terms 

and conditions for getting a refund. If the 

company has a no-refund policy, it must tell 

you so before you enroll. 

•	 Results. The company must tell you how 

many months or years it will be before the 

company will make an offer to each creditor. 

•	 Offers. The company must tell you how 

much money or what percentage of each 

outstanding debt you must save before it will 

make an offer to each creditor. 

•	 Non-payment. If the company asks you to 

stop making payments to your creditors – or 

if the program relies on you not to make 

payments – the company must tell you about 

the possible negative consequences of doing 

so, including:

•	 damage to your credit report and credit 

score; 

•	 your creditors may sue you or continue 

with the collections process; and 

•	 your credit card companies may charge 

you additional fees and interest, which 

will increase the amount you owe.

Tax Consequences

Depending on your financial condition, 

the money you save by using debt settlement 

companies can be considered taxable income. 

Credit card companies and others may report 

debt settlements to the IRS, and the agency 

may consider it income, unless it finds you are 

“insolvent.” You are insolvent when your total 

debts are more than the fair market value of your 

total assets. It can be complicated to determine 

whether someone is insolvent. If you’re not sure 

whether you qualify for this exception, talk to a 

tax professional. 

Red Flags

Avoid doing business with any company that 

promises to settle your debt if the company: 

•	 charges any fees before it settles your 

debts

•	 touts a “new government program” to bail 

out personal credit card debt

•	 guarantees it can make your unsecured 

debt go away

•	 tells you to stop communicating with 

your creditors 

•	 tells you it can stop all debt collection 

calls and lawsuits

•	 guarantees that your unsecured debts can 

be paid off for just pennies on the dollar

FTC Facts For Consumers 2 FTC Facts For Consumers 3
Other Options

Working with a debt settlement company is 

just one option for dealing with your debt. You 

also could: negotiate directly with your credit 

card company, work with a credit counselor, or 

consider bankruptcy.

•	 Talk with your credit card company, even 

if you have been turned down before. Rather 

than pay a company to talk to your creditor 

on your behalf, remember that you can do it 

yourself for free. You can find the telephone 

number on your card or your statement. Be 

persistent. Keep good records of your debts, 

so that when you do reach the credit card 

company, you can explain your situation. 

Your goal is to work out a modified payment 

plan that reduces your payments to a level 

you can manage. 

If you don’t pay on your debt for 180 days, 

your creditor will write your debt off as a 

loss; your credit score will take a big hit, and 

you still will owe the debt. Creditors often 

are willing to negotiate with you even after 

they write your debt off as a loss.

•	 Contact a credit counselor. Reputable 

credit counseling organizations advise people 

on how to manage money, bills and debts; 

help them develop budgets; and usually offer free information and workshops. They 

should discuss your entire financial situation 

with you, and help you develop a personalized plan to get you out of debt. 

A new law requires credit card issuers to include a toll-free number on their statements 

that directs cardholders to information about 

finding nonprofit counseling organizations. 

Most credit counselors offer services through 

local offices, the Internet, or by telephone. 

Look for an organization that offers inperson, face-to-face counseling. Many 

universities, military bases, credit unions, 

housing authorities, and branches of the 

U.S. Cooperative Extension Service operate 

nonprofit credit counseling programs. The 

federal government maintains a list of government-approved organizations, by state, at 

www.usdoj.gov/ust, the website of the U.S. 

Trustee Program. That’s the organization 

within the U.S. Department of Justice that 

supervises bankruptcy cases and trustees. If a 

credit counseling organization says it’s government-approved, check the U.S. Trustee’s 

list of approved organizations to be sure.

•	 Occasionally, a credit counselor may suggest 

that you consider filing for bankruptcy. 

Declaring bankruptcy has serious consequences, including lowering your credit 

score, but credit counselors and other experts 

say that in some cases, it may make the most 

sense. Filing for bankruptcy under Chapter 

13 allows people with a steady income to 

keep property, like a mortgaged house or a 

car, that they might otherwise lose through 

the Chapter 7 bankruptcy process. In Chapter 13, the court approves a repayment plan 

that allows you to pay off your debts over a 

three to five year period, without surrendering any property. After you have made all the 

payments under the plan, your debts are discharged. As part of the Chapter 13 process, 

you will have to pay a lawyer, and you must 

get credit counseling from a governmentapproved organization within six months 

before you file for any bankruptcy relief. 

A new law requires credit 

card issuers to include a 

toll-free number on their 

statements that directs 

cardholders to information 

about finding nonprofit 

counseling organizations.

For More Information

The FTC has free materials about dealing with 

credit card debt at ftc.gov/credit: 

•	 Knee Deep in Debt 

•	 Fiscal Fitness: Choosing a Credit

Counselor

•	 Before You File for Personal Bankruptcy: 

Information About Credit Counseling 

and Debtor Education

•	 ftc.gov/moneymatters

For more information about dealing with

mortgage debt, visit ftc.gov/yourhome.

•	 Mortgage Payments Sending You 

Reeling? Here’s What to Do

•	 Foreclosure Rescue Scams: Another 

Potential Stress for Homeowners in 

Distress

FTC Facts For Consumers 4 FTC Facts For Consumers 5
The FTC works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP 

(1-877-382-4357); TTY: 1-866-653-4261. Watch a new video, How to File a Complaint, at 

ftc.gov/video to learn more. 

The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online 

database and investigative tool used by hundreds of civil and criminal law enforcement agencies in 

the U.S. and abroad.

6 FTC Facts For Consumers

For The Consumer Federal Trade Commission

www.ftc.gov 1-877-ftc-help

Federal Trade Commission

Bureau of Consumer Protection

Division of Consumer and Business Education