"Debt settlement" or "debt negotiation" companies run ads on TV and on the internet, and promise to reduce or "eliminate" your credit card debt. Is this for real? How does it work? Is it legal? Now in this blog post, I am NOT talking about legitimate credit counseling firms such as Money Management International, or other firms that are non-profit, and arrange what are known as "debt management plans." These are perfectly legitimate, and involve you paying back 100% of the principal amount of the debt, plus some interest.

Debt Settlement Companies are regulated in Texas. They are supposed to be registered with the Office of the Texas Consumer Credit Commissioner. Call them to see if your company is listed.

If the company's name is not on that list, then they are not operating legally as a debt settlement company in Texas, and you may be entitled to all your money back, and your attorney's fees and court costs if you have to sue them. The law that regulates them is the Texas Debtor Assistance Law, which is Chapter 394 of the Texas Finance Code.

In any event, do Debt Settlement Companies even work? Do they do what they say they will do? In my experience, no they don't. And they charge you a ton of money, often upfront. What do they do? The way it works, they have you stop paying your credit card debts, and start paying them. Usually they are paid the first few months of your monthly payments as their fee.

After 90-180 days of non-payment, your credit card banks "charge off" or write-off your account, considering it uncollectible as far as their accounting goes. That doesn't mean that they will stop trying to collect it. After that, they will typically sell your debt to a debt buyer or refer the debt to a debt collection agency. If those companies can't collect the debt, it may eventually be referred to an attorney to file suit.

Anyway, Debt Settlement Companies will propose to settle your accounts, once they are charged off, for say 50% of the amount owed. Some creditors insist upon more than that, others will take less. Your credit has been seriously damaged by this point. And you must typically pay "lump sum" payments to settle the debt. Not only that, but the amount of the debt that is forgiven can be considered income to you for tax purposes, and the credit card bank may send a 1099 to the IRS upon which you must pay tax (there are exceptions to this). And unfortunately, there are "less than honest" debt settlement companies that have been known to collect payments from consumers, and then close up shop and skip town. Or file bankruptcy.

Either way, you are out all the money that you paid them. And you still owe your debts. From my take on things as a consumer bankruptcy attorney since 1982, you should shy away from these debt settlement companies. You can either settle your debts yourself, or hire an attorney to do it for you.

Or, if you have serious debt issues and you cannot pay your debts, you can consider filing a Chapter 7 bankruptcy or a court-supervised repayment plan under Chapter 13. If you want to settle your debts but you're not sure how, come in and meet with us. We help a limited number of our clients to settle debts, but only when it is realistic and practical.

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
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