How Do You Know if a Debt Settlement Company Is Legit?

Debt settlement is a legitimate debt relief strategy. That said, fraud has been an issue. Some companies have more integrity than others. The good ones walk you through the risks before you enroll. The bad ones raise major red flags—we’ll get to those below.

You don’t need to go through a debt relief company at all. Debt settlement is a legitimate strategy, one flexible enough to accommodate those who do and don’t want expert help.

Debt settlement is a legitimate debt relief strategy

Debt settlement means negotiating with creditors to accept less than the full balance on unsecured debts. That includes credit cards, medical bills, and personal loans. Creditors agree to settlements routinely. It’s not something they advertise, but it’s normal.

You might do it yourself. You could call your creditors directly, explain your hardship, and negotiate a settlement without hiring anyone. Debt settlement companies are there when you prefer experienced negotiators handling that process. They know creditor policies and do this on the regular.

The program is for people experiencing hardship: those who can’t afford minimum payments, who need a way forward that isn’t bankruptcy. Most settlement programs run at least two to four years, depending on total debt and how much you can deposit each month.

Why there are skeptics

The debt settlement industry has had serious problems. The Federal Trade Commission amended its Telemarketing Sales Rule in 2010 specifically because companies: 

• Charged upfront fees
• Made misleading claims 
• Failed to disclose credit impact, lawsuit risk, and program limitations

The updated rules make all that illegal. But dodgy deals haven’t gone away entirely.

How to tell if a debt settlement company is legitimate

Before you sign anything, check off your must haves. Two big ones: the company doesn’t charge fees before settling your debt, and their rep walks you through the risks upfront.

They don’t charge fees before settling your debt

The FTC’s Telemarketing Sales Rule says debt settlement companies can’t collect fees until a debt has been successfully negotiated, you’ve approved the agreement, and you’ve made at least one payment toward the agreement. Any company asking you to pay debt settlement fees before that point is breaking federal rules. Stop there.

They walk you through the risks before you enroll, in writing and out loud

A settlement company has to tell you the following before you sign anything:

• Your credit will be affected. Creditors report enrolled accounts as late to credit bureaus. This is normal and could damage your credit score, especially if you’ve never missed a payment.
• Creditors may sue you while accounts are unsettled. It doesn’t happen in every case, but you need to know it could. If you’re sued by a creditor, consult a lawyer. Ask your debt relief company what support they’ll offer if you’re sued.
• There are no guarantees. A company cannot promise that every debt will be settled, or promise to settle for a specific amount.
• Your dedicated savings account is yours. Only you can authorize withdrawals. You can leave the program at any time without penalty.
• Forgiven debt may be reported to the IRS. Talk to a tax advisor. Depending on your situation, some or all of it may be taxable.

If a company walks you through this before enrollment, that’s a legitimate company doing its job. If they gloss over any of it, give vague answers about fees, or pressure you to sign before you feel ready, walk away.

Red flags that tell you to walk away:

• Ask for fees before settling any debt
• Guarantee specific outcomes or savings amounts
• Rush you through enrollment before disclosures are complete
• Won’t provide written program terms before you sign
• Vague or evasive about how and when they get paid

A legit debt settlement company will welcome these questions.

Bills Action Plan

1. Check the fee policy before anything else: Federal rules say debt settlement companies can’t charge fees before your debt is settled and you’ve approved the offer. If a company asks for money upfront, walk away.
2. Make sure they walk you through the risks before you sign: A legitimate company has to tell you in writing and in conversation that your credit will be affected, that creditors may sue you, and that there are no guarantees. If that conversation doesn’t happen, ask for it. If they won’t have it, walk away.
3. Get the full program terms in writing before you enroll: Fees, timeline, what happens if a creditor won’t settle, and how to exit if needed. A company that won’t provide this before enrollment isn’t legit.