Debt Settlement Myths & Facts

The advertisements can be misleading.


This morning on the radio, I heard an ad that asked listeners if they knew they had a right to settle with credit card companies for a fraction of what they owed.

Unfortunately, that's not really how it works. No one has a "right" to settle with credit card companies for a fraction of what they owe. Anyone has a right to ask, sure, but the credit card company also has a right to say no.

In fact, debt settlement companies aren't always as good a deal as they seem. While they can help negotiate with credit card companies for lower settlements, they also charge hefty fees, usually over 10 percent of the total balance owed. Settling a debt -- in other words, paying just a fraction of it -- also hurts consumers' credit scores. Consumers also find themselves liable for taxes on the debts that were forgiven. The National Foundation for Credit Counseling recently warned about the slew of advertisements taking over the airwaves promoting debt settlement. "The reality may be very different from the rosy picture painted by the commercials," says the NFCC's Gail Cunningham. She also warns that the debt settlement industry is largely unregulated, which can make it hard for consumers to select an experienced company.

  • For an interview with the president of a debt settlement company, read "Weighing the Benefits of Debt Settlement."