There is a movement afoot to increase the regulations governing debt settlement companies. These are the companies who advertise that they can negotiate substantially reduced deals with your credit card companies. If you have seen a banner ad that says something like, “Reduce your credit card debt by 40-50%”, odds are you have encountered a debt settlement company.
USAToday.com ran an article today on this very topic. They interviewed a couple of people who had used debt settlement companies, one got bad results, one got good results. Over the years I have seen a lot of clients who have used one of these companies before coming to see me. I have them bring me there contracts. Some of them are downright appalling.
There are two problems with the debt settlement business model. In order to do it well you have to really work your files and you have to be very, very good. There may be a way to do it well representing people in other States, but I don’t see how. To do it well, in my opinion, you need to be prepared to aggressively defend collection litigation as it gets filed. (If you are considering a debt settlement company, read the contract completely but pay particular attention to what they do with the money you send them and what they will, or more likely won’t, do if you get sued during the process.)
I have heard of a good debt settlement company in Texas. They only take clients in their area, and I heard a presentation about them some years ago; but I no longer remember their name. Even a good debt settlement company can’t get you out of the second problem.
If you “settle” debt by convincing a creditor to accept less than it is owed, the amount that you don’t pay will get reported to the IRS as forgiveness of debt income. I have written about that before. This means that unless you meet certain tests and deal effectively with the IRS, you could wind up having to pay taxes on the amount of debt that was forgiven. Oops.
Debt settlement companies know how to say what desperate people want to hear. Just remember the old rules. Read everything. Don’t sign anything you haven’t read or that you don’t understand. When in doubt call the Better Business Bureau, and always know where the money goes and who gets it.