Debt Settlement: 7 Questions To Ask Before Agreement

Debt settlement can help if you’re struggling to keep up with your bills. But not every company offering these services has your best interests at heart, and choosing the wrong one could leave you in even deeper financial trouble. Before you sign up, ask these key questions.

Debt settlement companies typically charge a fee for their services, usually based on either the amount of debt you enroll in the program or the amount they save you through negotiations. Fees commonly range from 15% to 25% of the enrolled debt, though costs can vary by company and state. Under federal rules, for-profit debt settlement companies generally cannot charge fees until they’ve successfully settled or reduced at least one of your debts, you’ve agreed to the settlement and you’ve made at least one payment toward it. If a company asks you to pay up front before settling any debt, that’s a major red flag.

If cost is your biggest concern, New Era Debt Solutions charges some of the lowest settlement fees among major providers we reviewed, ranging from 14% to 23% of enrolled debt. Clients complete the program in about 28 months on average, which is faster than many competitors. You’ll generally need at least $10,000 in eligible debt to enroll, and services are available in Spanish. New Era isn’t available in Iowa, Maine or Oregon.

Debt settlement can provide relief from overwhelming debt, but it almost always comes at the expense of your credit score. Because most programs involve pausing payments while the company negotiates with creditors, you’ll likely rack up late payments and delinquencies that hurt your credit. Settled accounts are also generally reported as having been paid for less than the full amount owed. While your credit can eventually rebound, you should go into the process expecting some short-term financial pain.

Not every company that markets itself as a debt settlement provider is legitimate. Look for providers that belong to the American Association for Debt Resolution (AADR) or are accredited from the International Association of Professional Debt Arbitrators (IAPDA), both of which have standards for ethical practices and consumer protections. Some states also require debt settlement companies to be licensed, so it’s worth checking your state attorney general’s website to understand the rules where you live.

If you’re looking for a company with a long track record and strong customer reviews, Pacific Debt Relief has been helping consumers since 2002 and maintains an average customer rating of about 4.9 out of 5 stars on the Better Business Bureau. The company operates in 49 states, requires at least $10,000 in eligible debt to enroll and charges settlement fees ranging from 15% to 25% of enrolled debt. Services are available in Spanish. Pacific Debt Relief isn’t available in Oregon.

Possibly, and it’s a detail that catches many people by surprise. In general, the IRS treats canceled debt of $600 or more as taxable income. So, if you owed $10,000 and settled the debt for $6,000, the forgiven $4,000 could be considered taxable, much like additional income. There are exceptions, however. For example, you may not owe taxes on the forgiven amount if you were insovlent (basically bankrupt) when the debt was canceled. Before enrolling in a debt settlement program, it’s a good idea to consult a tax professional so you understand any potential tax consequences and aren’t caught off guard come tax season.

If part of what you owe is to the IRS, CuraDebt is one of the few major debt relief companies that also helps resolve tax debt and even offers audit representation. Consumer debt settlement fees generally range from 15% to 25%, though tax resolution fees aren’t publicly disclosed and vary based on your situation, so you’ll need to ask for a quote. The company also says it will match or beat a competitor’s fees if that provider has a comparable BBB rating. Tax debt services are available in 26 states and Washington, D.C., so confirm availability where you live before moving forward.

Debt settlement isn’t a quick fix. Most programs take two to four years to complete, and plenty of consumers don’t make it to the end. Before signing up, ask what percentage of clients successfully settle their debts and what happens if you drop out before the program is finished. A trustworthy company will provide straightforward answers, not sales pitches and vague commitments.

Debt settlement isn’t the only path out of debt, and for some people, it may not be the best option. If your debt is manageable, a nonprofit credit counseling agency may be able to help you enroll in a debt management plan that lowers your interest rates and simplifies repayment. If you have good credit, a debt consolidation loan could combine multiple balances a single payment and potentially lower your borrowing costs. And if your financial situation is especially severe, bankruptcy may provide a faster path to relief and, in some cases, eliminate certain debts altogether. Before enrolling in a debt settlement program, take the time to explore your alternatives.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every debt settlement is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of debt settlement products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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