Debt Articles Debt Settlement Related

Debt Settlement: Top Ten Most Misunderstood Facts

Over the past few years debt settlement has been in the news, not always in a good way. Many consumers have complained about the services they’ve received while some have been very happy. Much of the disparity in the perception of the service is due to misconceptions about the process itself.

So here are the top ten misconceptions I see out here on the front lines.

1. “We’ll Stop All the Collection Calls.” – While some debt settlement companies say they can stop collection calls by sending a letter. What they are referring to is sending the company a cease & desist communication letter to stop the entity collecting from calling. But that letter only applies to third-party collection companies and has no power to stop the creditor that you owe the debt to from calling. In fact, sending the letter and cutting off communications can lead to you getting sued faster since the only route of communications left will be through the court. The original creditor, who the cease & desist letter has no power over may just send your account to legal anyway when they get the letter because they don’t want to hassle with the debt settlement.

2. We Will Take Over and Work With Your Creditors. You Won’t Have to Do a Thing.” – When you took out the loan or credit you signed an agreement with the creditor. The debt settlement company is not a party to that agreement and has no authority to intervene between the lender and borrower. The debt settlement company is providing a service on your behalf and while you may give them permission to talk to the creditor, if the creditor does not want to deal with them, they don’t have to. Your creditor may have a policy of not working with any debt settlement company. There is nothing that requires them to.

3. “We Will Make Your Creditor Accept Less Than You Owe.” – A creditor does not accept a settlement because it makes the most sense, but if their policies and procedures allow the department you are communicating with to accept it. Some creditors are more receptive to settling for less and others are not. Without the assistance of a debt settlement company that knows what the current policies are of that creditor, you don’t not know if they would be getting a good deal.

4. “Don’t Worry. Debt Settlement Will Not Hurt Your Credit.” – Creditors don’t entertain offers from people who are current on their bills. It’s just a function of the creditor policies and procedures that it is typically not until someone gets 90 days or more past due that they can offer a reduced pay off amount to satisfy the debt. During that time, payments are typically made to the debt settlement company assigned escrow account and not the creditor. This means you are electing to not pay the creditor and that makes them agitated. By not paying your creditor you will be in default of your agreement and the creditor will begin to add late fees, higher interest and penalties to your balance owed. Your balance will grow larger. Your account will be moved into the collection queue, will be reported to the credit bureaus for the lack of payments, and the creditor may sue you and go for a wage garnishment. Debt settlement is not a process without risks and penalties.

5. “Once You Pay the Settlement You Never have to Worry About The Debt Again.” – Not so fast. Unless you get the agreement in writing from your creditor they will accept less than the full balance as payment in full and you keep a record of them receiving your settlement payments, it can come back to haunt you. It is not unusual for a creditor to claim years later that they never agreed to accept less than the full balance to satisfy the debt. The only thing that is going to get you out of that is proof of the offer and proof they received the payment. Be sure you make that settlement payment by some traceable means, like a draft from your bank or by check. Keep copies of bank statement or cashed checks with the settlement offer in a safe place with your other important papers.

6. “Settling Your Debt Will improve Your Credit and Debt to income Ratio.” – Some debt settlement companies say debt settlement will help your credit report since it will lower your outstanding debt to income ratio. But that’s not the whole story. When you fall behind on your bills to settle your debt, that will be reported on your credit report for seven years from the time you became delinquent. Any lawsuits to attempt to collect the debt will appear as well. The balance of the debt that was settled and not paid will appear as a bad debt for seven years as well. At the end of the process you may no longer owe your creditors but your credit report will be hurt and need some serious attention to bring your credit score back up.

7. “You Can’t Trust Any Debt Settlement Company.” – That’s not true. Some debt settlement companies, and especially those that are a member of the AACC are open and transparent about their actual performance in settling debt, only charges you a fee as a percentage of savings when they do settle, and will maintain any payments you make in a bank account monitored by a third-party escrow company. You want to look for a company that will share their actual performance statistics with you in writing to show you their track record. Working with a good debt settlement company can be beneficial if debt settlement is right for you. They will have the experience to know if the deals being offered are good based on the current policies of the creditor.

8. “You Have to Hire Us to Settle Your Debt.” – There are some companies out there that will teach you how to settle your own debt for a fraction of the cost of paying a settlement company to do it for you. They can guide you through the process and coach you when you have questions or concerns as you go. Two of the companies that offer this coach supported process are Consumer Recovery Network and ZipDebt.

9. “Hiring an Attorney to Settle Your Debt is the Best Way to Go.” – It is not necessary to pay a lot of money to hire an attorney based company to settle your debt. Settling debt is not a function of legal pressure but of knowing the current policies and procedures of the major creditors. If you have a local attorney that is going to perform all the work locally and you have a trusted relationship with that attorney, then maybe you’ll want to work with them. However, if you are being pitched debt settlement services by a salesperson for debt settlement services provided by a legal network then you may want to get a second opinion before you agree to enroll. I find these legal networks to be pricy and charge all their fees on the front-end of the program, before the debt is settled, even if they never settle your debt. And while these legal networks may promise to represent you if you are sued, the devil is in the details. You can read my review of one of these attorney network model contracts here. I think you’ll be surprised what it didn’t cover and how it really cost about twice as much as other debt settlement companies offering performance based fees.

10. Debt Settlement is the Best Way to Get Out of Debt.”Debt settlement is not for everybody. It is one arrow in the quiver to pull when dealing with debt problems. Other common solutions include credit counseling, bankruptcy, making income or budget adjustments, debt consolidation loan, and working with the creditors directly. Debt settlement is most appropriate if you have cash on hand to pay 50% of the balance owed without raiding retirement accounts. While debt settlement may help you to avoid bankruptcy and is sold as a way to avoid bankruptcy, bankruptcy is not a process to be feared. In fact it is the only solution that gives you any legal rights and power over the creditors regarding debt problems.

For the right person in the right situation debt settlement can be the right solution. When it comes to getting out of debt the real skill comes in matching the appropriate solution to the situation and the goals of the individual. If you need some free help and advice on how to get out of debt just stop by and my expert friends and I will be happy to lend a hand.


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.


  • Thank you for pointing out some of these misconceptions. As the owner of a very ethical debt settlement company, it’s refreshing to see that some people actually do acknowledge that there are honest companies operating.

  • Thank you for pointing out some of these misconceptions. As the owner of a very ethical debt settlement company, it’s refreshing to see that some people actually do acknowledge that there are honest companies operating.

  • the points mentioned here if are true, debtors should be more careful than before while hiring a debt settlement companies or a debt attorney. should check all available information form all possible and reliable sources.

Leave a Comment

Scroll to Top