Consumer Debt Settlement Programs

Debt settlement programs reduce overall debt through creditor negotiation. While technique may vary depending on the debt relief company, the idea behind debt settlement is to convince creditors to accept a reduced lump-sum payment in lieu of the entire amount owed. Successful debt settlement not only lowers overall debt, it can provide an alternative to bankruptcy for cash-strapped consumers. As with any business deal, do your homework on debt settlement options and particular companies before signing a contract.

Debt Settlement Process

Unless you already have considerable delinquencies, a debt settlement agency may instruct you to stop paying your bills in hopes that a creditor desperate for payment will be more willing to negotiate. In most cases, you make payments to the settlement company. Once these funds build up, the settlement company offers creditors a lump-sum payment to settle the debt. Negotiations may be lengthy, and success depends on how willing your creditors are to negotiate and the total amount owed.

What to Look For

Contact your State Attorney General's office regarding licensing requirements and check with the Better Business Bureau for consumer complaints before signing a contract. Reputable companies clearly detail contract terms, time frames and costs. Opt for a debt relief company offering credit counseling as well as settlement help. Ask about guarantees, and get them in writing. Do the math when it comes to fees to make sure your monthly payments or percentage-based fees are manageable. Choose an agency that addresses your questions and concerns clearly.

Concerns

Be wary of companies claiming to erase or reduce debt to "pennies on the dollar" or promises to eradicate negative credit information. Creditors are not obligated to work with debt settlement companies or make deals and barring inaccurate information, agencies cannot remove negative marks on your credit report. Agencies may instruct you to stop communicating with or making payments to creditors. Late payments will end up on your credit report, potentially lowering your score.

Laws

Under the Federal Trade Commission's Telemarketing Sales Rule, debt relief agencies cannot charge upfront fees, misrepresent services or make false claims to consumers. To collect payment, an agency must have renegotiated, reduced or changed the terms of at least one debt for the client. Agencies must disclose all costs, time frames and possible negative consequences resulting from debt relief programs. The TSR covers incoming calls from potential clients, as well as outgoing sales calls.