Cut Your Debt In Half (NOT)–What Debt Settlement Companies Are Really Selling

“You have the RIGHT to cut your debt in half!”  That’s the emphatic claim of one late-night commercial for a debt settlement plan that I happened to see.  Others promise quick and painless debt relief.  In my upstate South Carolina practice, I’ve had clients ask me “what about the law that lets me cut my debt in half.”  Sorry to dash your hopes, but there is no such law, and there is no “right” to cut your debt in half.  And no, there is no quick and painless way to get relief from your debts.

But the people selling debt settlement plans in particular don’t want you to know that.  A debt settlement plan is supposed to work like this.  You stop paying your credit card bills, and instead you send a monthly payment to the debt settlement company.  They keep part of the money, and put the rest away for you (in theory, at any rate) and when there is enough accumulated, they make a settlement offer to one or more of your creditors.   Your creditors, after receiving no payments for a period of time, are supposed to then be willing, even anxious, to settle with you for less than the full amount owed.  But the concept is flawed to begin with, and the execution is even worse.

First of all, maybe you noticed when I was laying all that out, but the debt settlement company isn’t doing anything that you can’t do for yourself.  YOU stop paying creditors.  YOU deal with the phone calls, letters, and bills.  YOU can save up money to make a settlement offer.  And YOU can make a settlement offer after you save up the money.   The debt settlement company has no magic way to make your creditors stop contacting you, or even suing you,  while you’re in this process.  It doesn’t save your credit.  And the creditors don’t HAVE to accept the settlement offer made through the company, any more than they HAVE to accept an offer you make yourself.  In short, debt settlement companies don’t have any real service to sell.

In many cases, it’s worse than that.  By the time the debt settlement company takes all it’s fees (for the non-existent service) you aren’t able to build up any cash to make settlement offers.  I’ve also heard complaints from clients about how the fees were (or were not) disclosed, and how the money was used.   “The concept is nuts.”

Consumers Union recently advised debtors not to use settlement companies. In 2005, the Center for Responsible Lending said that such services are only appropriate for a very thin slice of consumers — those who cannot pay their bills but can pay something toward their debts each month.  The vast majority of those consumers could work out their own arrangements with lenders, it said.”Basically you are saving your money instead of paying your bills, and paying someone to do that. The concept is nuts,” said Gail Hillebrand, legislative director for Consumers Union. “Those who can’t pay their bills should be in bankruptcy.”

The FTC has just put into effect new rules which are designed to curb some of the worst practices of debt settlement companies.

Starting [September 27], debt settlement firms must disclose to consumers the time it will take to reduce the debt, when the firm will negotiate a settlement with creditors, and how much money consumers must set aside before a settlement offer will be made. Debt settlement firms also must tell consumers about the negative consequences of not making payments to outstanding creditors, such as being subject to collections or lawsuits, decreased creditworthiness, and increased debt.

. . .

Beginning on October 27, new rules will go into effect that will prohibit debt settlement firms from collecting fees for their services until they have settled some or all of a consumer’s debt. Under the new rules, a debt settlement company cannot charge any fees until it reaches a settlement on at least one of the consumer’s debts that the consumer agrees to in writing. Fees cannot be collected until the consumer has made at least one payment to the creditor as a result of the negotiated agreement.

The new FTC rules further regulate debt settlement and debt management companies, and those that use telemarketing to sell the services as well.

I’m sure those telemarketers will be calling, and those commercials will be broadcast non-stop, until those rules all go into effect.  Until then, here’s a list of things to consider before signing up for debt settlement services, put together by the New York Attorney General’s office, which has been on the warpath against some of the worst of those offenders:

  • Be wary of debt settlement companies that promise to obtain settlements for much less money than consumers owe.  Many debt settlement companies misrepresent their typical results and their success rates.
  • Avoid debt settlement companies that require payment in advance of obtaining the promised settlement.
  • Keep in mind that debt settlement plans may not stop creditors from charging interest, late fees, or other penalties on outstanding debts, and do not prevent creditors from bringing collection lawsuits.  In addition, failure to make required payments on your debts will negatively affect your credit score.
  • Creditors are under no legal obligation to accept a settlement offer for less than the outstanding balance owed.
  • Only a small number of consumers who enroll in debt settlement plans are able to complete them. Usually, consumers drop out after having paid service fees to the companies without receiving any benefit from their enrollment.
  • Enrollment in a debt settlement plan premised on stopping payments to creditors will likely lead to more frequent and aggressive creditor collection efforts and may result in judgments, wage garnishments, and freezing of bank accounts.
  • Check with the Better Business Bureau to obtain a Reliability Report on a particular debt settlement company and its rating.
  • A wise first step to help resolve an outstanding account is to speak directly to the credit card issuer or other creditor.

I would add another item to that list.  Go see an experienced bankruptcy lawyer to discuss whether bankruptcy is a better option.  Almost everyone I’ve talked to who goes through an unsuccessful debt settlement or debt management plan tells me that one reason they chose that route was that they didn’t think they could afford bankruptcy.  Only, as it turns out, they pay those companies more in fees than a bankruptcy would cost.

Maybe it’s just me, but those late-night commercials for easy and painless debt relief, and your “right” to cut your debt in half, are just like all the crazy diet fads I used to fall for (although I will say that the cabbage soup diet was a non-starter with me from the get-go).  You know, lose 40 pounds in 4 weeks by eating grapefruit and celery sticks; get a flat stomach in only 5 minutes a day–those fads that prey on our deep-seated need to believe that we can lose weight and get fit without any effort, deprivation, or self-control.  I’ve been looking for a long time now, and I’m pretty sure there is no magic weight loss formula.  And unfortunately, there is no quick and painless way to get out of debt, either.  Know your options before signing on to what sounds like a good idea, but probably isn’t.


Däna Wilkinson (pronounced "Donna") is a bankruptcy lawyer practicing in Spartanburg, South Carolina and serving South Carolina's upstate region, including Greenville, Spartanburg, Gaffney, Union, Anderson, Easley and Pickens. She has been in practice for more years than she cares to count, but it’s more than 20 years. Däna has been a bankruptcy lawyer from the very beginning of her career as a lawyer.

Däna went to law school at the University of South Carolina, where she was Student Works Editor on the South Carolina Law Review and a member of the Order of Coif. She started doing bankruptcy work while still a student, working for a bankruptcy boutique firm whose members included a Chapter 7 panel trustee, and recognized experts in Chapter 11 reorganizations. She enjoyed the work from the beginning, and upon graduation took a job as a law clerk to the Honorable Rodney Bernard, bankruptcy judge for the Western District of Louisiana. Judge Bernard had spent a number of years on the bankruptcy bench, and was an excellent teacher and mentor. Upon Judge Bernard’s retirement, Däna stayed on for a time as clerk to the Honorable Donald W. Boe, until homesickness for South Carolina struck, and she returned to private practice in Charleston. Four years later, she received an offer to return to Columbia, where she practiced until 1997.

In 1997, planning to start a family, Däna decided to return home to the Upstate, and opened her own practice in Spartanburg in 1998. Over the years, Däna represented all sorts of parties in bankruptcy: business debtors in reorganization, individual debtors, creditors and creditors’ committees, and trustees. In establishing her own practice Däna decided to focus on consumer debtors, ordinary people who find themselves overwhelmed by debt. Her focus is on the individual needs of clients, and on crafting a solution to their unique financial needs. She is committed to helping clients make a fresh start, and preserving their dignity in the process.

Däna is the proud mother of a beautiful, talented and very active daughter, who is, as her mother says, “practically perfect.” She is also active in both church and community activities, all of which means that there is a fair chance that any given blog post was written while in the car pool line or while waiting for a hearing or a meeting to start.

Däna is also certified as a bankruptcy specialist by the South Carolina Supreme Court, which means that she has taken and passed a proficiency examination on bankruptcy law, devoted her practice to bankruptcy for a number of years, and continues to take classes on bankruptcy law and related issues.

Contact information for Däna Wilkinson:

Law Office of Däna Wilkinson
365-C East Blackstock Road
Spartanburg, SC 29301
(864) 574-7944
[email protected]

Däna also blogs at

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