The Color of Money

There’s no fast, easy way to get out of debt

When I hear the words, “What do you think of debt settlement?,” I cringe. I gird myself for a frustrating discussion with desperate debtors looking for a quick fix. They want to get rid of their debts as easy as it takes to bake a potato in the microwave. They want the phone calls and letters to stop.

And so they want to believe — need to trust — the advertising from companies that claim a significant reduction of debt for just pennies on the dollar. One firm promises in its online ad that “if you owe $30,000, you could resolve your debt in as little as 24 to 48 months.” The statement comes with a fine-print caveat saying that including fees, clients still end up paying as much as 75 percent of what they owe. And there is no guarantee the program will work.

Only about 1 in 10 consumers participating in debt-settlement programs actually end up debt-free in the promised period of time, according to the nonprofit National Association of Consumer Bankruptcy Attorneys.


Debt-settlement companies promise to negotiate with your creditors. Typically, customers are told to stop paying their bills and send money to the debt-relief firm, which holds it with the intention of offering creditors a lump-sum for less than what’s owed.

Get Talking Points in your inbox:
An afternoon recap of the day’s most important business news, delivered weekdays.
Thank you for signing up! Sign up for more newsletters here

“These companies prey on the most desperate victims of the economic downturn,” said Ed Boltz, incoming president of the consumer bankruptcy association. “These particularly vulnerable consumers usually end up getting sued, stuck with outrageous fees, more deeply in debt, and far worse off in terms of their credit score.”

One of the biggest problems with debt-settlement programs is that they encourage consumers to default on their debts, Boltz said

Let’s look at two cases provided by the association. The people: A Florida couple with about $60,000 in credit card debt, and a California retiree with $79,000 in bills.

The company told the Florida couple they needed to pay $31,200, including the firm’s fees — a savings of $28,800. The firm took $6,900 upfront and started collecting monthly payments of first $460, then $230. The couple couldn’t afford the payments and never got any debt settlement.


A 77-year-old Californian said he saw a commercial for a company that said it was possible for him to reduce his debt by 50 percent. The company began taking $1,800 a month out of his bank account. “I realized I would have to pay 15 percent of the gross [debt] amount or close to $12,000 upfront out of the $1,800 before settling any debt,” the retiree said.

He paid the company $25,200. Not one of his debts was settled.

Federal rules put in place two years ago now make it illegal for debt-relief services to charge upfront fees. Companies that sell their services over the telephone can’t get paid until they successfully settle or reduce a customer’s credit card or other unsecured debt. The companies have to make specific disclosures to potential customers.

If you’re thinking about debt settlement, go to and search for “Debt Relief Services.” Read the advisory by the consumer bankruptcy association at

Michelle Singletary writes for the Washington Post.