What Is the Dedicated Savings Account in Debt Settlement?

You stop paying your creditors. You start making monthly deposits. And somewhere along the way, someone tells you the company “holds your money.” What does that mean?

You have more control over your money than you might think. Federal law gives you rights that your debt settlement company must respect.

How does a dedicated savings account work in debt settlement?

The account is not held by the debt settlement company

The Telemarketing Sales Rule says that your account must be held at an insured financial institution, under your name, and that whoever runs it has no connection to your debt settlement company. The institution holding your money is likely an FDIC-insured bank or NCUA-insured credit union.

The savings account money is yours, interest included. Your debt settlement company can only collect its fees after

• it has successfully reached an agreement with a creditor to settle one of your debts
• You have approved the agreement, and
• At least one payment has been made toward that settlement.

The institution that manages your account may charge you a small monthly fee for doing so. This is one of the only fees you may have to pay before a debt is settled—the money goes to the bank or credit union, not your debt settlement company. Settlement fees vary by program, so ask your debt settlement company what fees apply before you enroll.

Who controls the money in a dedicated savings account?

You have more control than “they hold your money” implies.

You can leave the program at any time, for any reason, without penalty. If you do, you get your full balance back within seven business days. The only deduction is fees the company legitimately earned on debts already settled. 

These protections apply to anyone who enrolled by phone in response to an ad, a website, or any other marketing. If you’re unsure whether your program is covered, ask your debt settlement company directly.

A few things to keep in mind

• While you’re in a program, a creditor could still file a lawsuit to collect the debt.
• Credit damage during the program is typical. Settling debts for less than the full amount affects your credit.
• Forgiven debt from a settlement may be considered taxable income. Talk to a tax advisor about your specific situation.

Bills Action Plan

1. Ask your debt settlement company for the full name of the independent administrator holding your dedicated account. Confirm it is a separate institution, not affiliated with the company you enrolled with.
2. Request written disclosure of all fees that apply to your dedicated account, including any setup, monthly, or transaction fees. These reduce the balance available for settlement.
3. Ask for the name of the bank or credit union holding your account, and confirm the account is titled in your name. If you can’t get a clear answer, consult a consumer attorney in your state.

Related: What Actually Happens to My Money During Debt Settlement?