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Plan Well, Retire Well

Saving and investing your money

Debt Settlement Advertisements: Are They for Real?

I hear them all the time on the radio – ads proclaiming:

As a result of the American Reinvestment Act, if you have over $10,000 in credit card debt, you are entitled to settle for pennies on the dollar...

or something to that effect. It may sound pretty tempting. And the ads play on consumer outrage about bank bailouts, stating:

Banks received billions of dollars in bailouts, and they must use that money to settle your debts...

It sounds too good to be true, which sets off warnings bells from my internal fraud-alert detector. But from the ads, I couldn't tell what the catch was. So I did a little digging.

Consumer Reports gives an overview of the fees charged by debt settlement companies: "Regulators say that under the typical arrangement, companies charge up-front fees totaling 15 percent of the debt to be settled, a monthly service fee of $50 and if they do reach a settlement, a contingency fee of 20 percent or more of the amount they've allegedly saved. And the Internal Revenue Service might consider forgiven debt to be taxable income. "

That sounds pretty expensive! But I wanted to know more.

The Government Office of Accountability (GAO) did an undercover operation in which they contacted 20 debt settlement companies, posing as consumers seeking deft relief. Their experience confirmed that many of these companies are engaging in the deceptive and costly business practices reported by consumers:

  • The companies collect fees for their services before any debt settlement has been negotiated with creditors.
  • The companies collect monthly payments from the consumer, purportedly to build up a lump sum to use in negotiating partial payment of debt with lenders. But in several cases, the first several payments go entirely to the debt settlement company for fees, rather than toward that lump sum.
  • The companies advise the consumer to stop making payments on their credit cards and loans – even accounts on which the consumer was still current – resulting in substantial fees and interest that increased the amount of debt owed.
  • Companies claimed success rates in settling clients' debt of as high as 100%, although the Federal Trade Commission and others have typically found that less than 10% of clients complete these programs. (Consumer Reports says that the number was just 2% in a 2004 court case brought by the FTC against one debt settlement company.)

Even if a consumer completes the program, it may not save them any money on the debts they owe. One example cited by the GAO describes a couple whose fees and payments to the debt settlement company totaled 140% of their original debt. That means, if their debt at the time they contacted the debt settlement company was $10,000, they ended up paying $14,000. Some savings!

And these debt settlement programs are in no way associated with any legislation or government action dealing with the country's economic problems.

So what can you do if you're drowning in debt?

For one thing, you can try negotiating with creditors yourself. For tips on doing that, check Talking with Creditors, a Getting Through Tough Financial Times fact sheet from University of Illinois Extension.

Or, you can seek help. There are some reliable sources of assistance. The National Foundation for Credit Counseling ( can connect you with a non-profit agency that provides credit counseling. They will work with your creditors to set up a repayment plan. You'll make a single payment to the credit counseling non-profit, who will in turn make the negotiated payments to your creditors. Fees are usually determined on a sliding scale based on your financial circumstances. According to Consumer Reports, the enrollment fee should be no more than $25 and the monthly fee should be no more than $50.

If it's mortgage debt that is your problem, you'll want to talk to a certified housing counselor. Locate one by going to

I'd be interested in hearing any experiences you've had negotiating with creditors, dealing with debt settlement companies, or otherwise handling debt that's become a burden. Click on my name below, and tell me about it!

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