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ScamWatch

For-profit debt settlement

A company promises to negotiate your credit-card debt down to less than you owe — in exchange for telling you to stop paying your creditors first.

What it actually costs

Fees run 15%-25% of your enrolled debt. On $20,000 of credit-card debt, that's $3,000-$5,000 paid to the settlement company — on top of whatever penalties and interest pile up while you're told to stop paying creditors, and on top of taxes owed on any forgiven amount over $600 (the IRS treats forgiven debt as taxable income, reported on a 1099-C).

How it works

The company tells you to stop paying your creditors and instead deposit money into a dedicated account it controls, with the goal of eventually offering creditors a lump-sum settlement for less than the full balance. In the meantime, missed payments trigger late fees, penalty interest, credit-score damage, and — frequently — lawsuits from the original creditor or a debt collector, since nothing stops a creditor from suing while you're saving up. The CFPB's own consumer warning states plainly: "Debt settlement may well leave you deeper in debt than you were when you started." The CFPB and the New York Attorney General sued Strategic Financial Solutions in 2024 over an alleged debt-relief scheme exceeding $100 million.

Red flags

  • Any fee charged before at least one debt is actually settled — illegal for telemarketing debt-relief sales since a 2010 FTC rule.
  • Instructions to stop communicating with your actual creditors.
  • Guarantees of a specific settlement percentage before your creditors have even been contacted.
  • Pressure to open a new dedicated savings account you don't fully control.

A safer alternative: A nonprofit credit-counseling debt management plan (DMP), through an NFCC-affiliated agency

These consolidate your payments and negotiate lower rates or waived fees directly with creditors — you keep paying them, nothing stops — and typically clear card debt in 3-5 years. Free first session; modest setup (roughly ≤$75) and monthly (roughly $25-$50) fees. They generally don't damage your credit the way settlement does; one NFCC member agency reported average credit-score gains of about 106 points for clients who completed a plan.

Sources

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