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July 19, 2024

Debt Settlement – How it Really Works, Told by an Insider (Beware)

Exclusive: This is an article from a real insider who spent two years working at a debt settlement firm in a major city; taking thousands of calls and really learning the ins-and-outs of how debt settlement works. He contacted us to write his story, giving us details, truths and best practices for the industry that is supposedly helping real people get out of debt. Read it and decide for yourself if they are helping or preying on people.

The Dark Secrets of Debt Settlement:

To be blunt – Debt Settlement firms prey on your stupidity, laziness and fears.  Take it from me, an ex-insider who did his fair share. In contrast to the other representatives at my firm, I presented other paths to venture down if the customer was uninterested in our service.  Very few ever do.  I was eventually fired because I did not meet the quota.  I’m not angry for being fired.  I don’t think I was helping people.  I was helping my company be a middleman who takes advantage of people struggling to make it.  I’m writing this to inform the customer of the true merits of Debt Settlement.

The Debt Settlement Firms

There are about 10-15 prominent debt settlement firms in the U.S.  Just to let you know, they are all controlled by a few players.  So if you don’t go with one company and you go with the other, more than likely you are still working with the same owner.  The only difference is the customer representative or salesman that you are working with.

You may also notice that new companies pop up but have the same background story.  The reason being that an old company closed down because they had a bad reputation and just created a new entity to use.  Sound like Boiler Room to you?

The Process:

Debt settlement firms will discuss in general terms what debt settlement is, how it differentiates from credit counseling, a rough estimate of how much they can save you on a monthly basis and on your total principal amount (usually a whopping 50%). They will talk about the pros of the program, which all sounds good and dandy, making you feel good that there is something out there to help you out.

The firm will then pry information from you to use as leverage.  This is called the “qualification process“.

Questions include:

  • How much debt do you have?
  • How long have you had this debt?
  • Which credit cards?
  • Are you just making the minimum payments (of interest) or are you paying off the principal?
  • Have you noticed that your interest rates have been going up?”

Then they tell you things like: “These credit card companies are trying to take advantage of your situation.  You are a victim to these corporate giants.”  You might hear, “In order to get a better understanding of your financial situation, what is your annual income, monthly expenses?”

After getting this information from you, they will state that you are the perfect candidate for the program.  99.9% of the customers are “perfect” for the program. 

“You sound like you are eager to take control of your finances and want to have a new beginning.” But what they will do is pull it away from you.  Classic Bait and Switch tactic.

Both you and the firm knows that you are a good candidate for the program, but the firm will stress that this program is for people who really want to help themselves.  And people who are committed, a trust that you have with each other.  They will ask to pull your credit to get a better understanding of your finances.  Also, they will review it with you free of charge in order to figure out if they can really help you.  Once reviewed, they will say that they need to take your file to the “underwriters” to see if you are approved.

The truth is – there aren’t any underwriters.  They will call you back in 30 minutes while you squirm and hope that you are approved..  To create a sense of urgency, they will state that they had to make an exception for you and create a time limit of 48 hours for you to sign up, otherwise you cannot apply for another 30 days.  Basically leading/urging you to sign the forms.  Don’t worry though, they will go over the entire 20 page document with you.  (Note: This is me being sarcastic.)

The Game Plan

Once in the program, you stop paying the credit cards that you have agreed upon.  As a result, you cannot use those credit cards to buy anything.  You will make a payment to a third party Bank that is the custodian of your savings account.  This prevents any kind of conflict of interest between the Debt Settlement firm and the bank.  Within the first several monthly payments, half of those payments go to the Debt Settlement firm as fees and the other half is accumulated into  your savings account.

Firms differ in the way they collect the initial fees.  Some may even collect 100% of the first couple of months as fees so you are not saving any money until three months down the road.  Please note that Debt Settlement firms don’t start negotiating with a Credit Company until you have approximately 50% of the debt load of your smallest credit card principal.  So if you have three credit cards: 1st is for $2,000, 2ne for $5,000, and the 3rd for $8,000, in most cases they will not start negotiating on the first credit card until you have $1,000 accumulated in your savings account.  However, since the Debt Settlement firm deals with hundreds to thousands of clients, they can group some clients together who have X credit card together.  As an individual you have $8,000 of debt but with a combination with other clients there is a total of $150,000.  As a result the Debt Settlement firm has more leverage to negotiate with the bank and will get a better deal on reducing the debt.

In this example, if they were negotiating for you alone, they could drop it down to $3,500 (a savings of 56.25%).  But for the combination of clients, they can negotiate it down to $40,500 (a savings of  73.00%).  Sounds good to you, but remember, they take a % of the savings at the end of the program.  In a way they have an interest in saving you money, because the larger the savings, the more money the firm makes.  But you can do it yourself, and possibly get the same results of a Debt Settlement firm.  Saving you even more money that usually the Debt Settlement firm gets paid on.

Your Representative aka The Professional Salesman:

The most important thing to know about Debt Settlement firms is that they’ll do whatever it takes to close a deal.  The motto “ABC – Always Be Closing”.  The representatives of these firms are professional salesmen (usually ex-mortgage bankers who helped create the housing bubble).


  1. You are a number to them
  2. They have to meet a quota in order to maintain their job (at least 25 deals/month)
  3. The monthly payment plan a representative puts you on directly affects the money in the representative’s pocket.  The firm has a fee structure for the representatives.  For example, if a representative brings in 22-25 deals, then he/she takes home 25% of client’s first month’s payment.  30 deals brings in 30%, so on and so forth.  Max payment is 40-42%.  Minimum payment to a representative is approximately $2,500.
  4. I have even heard of a female representative flirt with a client by adding him to a myspace page in order to close the deal.  Dirty.
  5. Urgency strategies that they utilize:
  • only a limited number of people can sign up a month, therefore sign up today.
  • they make an “exception” for you to make you feel important, but then put a time limit of “This is only good for the next 48 hours.”
  • infuse fear that you could lose everything, the credit card companies are going to constantly harass you or even sue you, or the fear that you won’t be able to fund your children’s college, etc.
  • convince you that the program empowers you by creating your own financial freedom
  • use the total amount that you have paid the credit card company to overwhelm you with how these corporate giants are taking advantage of you.  The calculation is as follows:  the principal amount on your credit card, for x amount of years at a y interest rate, in reality you paid off z amount if you paid  the minimum payments that covered the interest.  Example is if you had $10,000 of unsecured debt, that you’ve had for 5 years, at an interest rate of 15%, then in reality you have paid $7,500 of interest only.  You have  really paid off 75% of your debt but it’s only interest.  So why don’t do a debt settlement plan and attack the principal only.
  • the firm states that with this program, you will be debt free in less than 36 months.  The reason being is that they sometimes state federal law requires a person who enrolls in a Debt Settlement program to settle his/her debt  within 36 months.  This is BS.    In reality, the Firm and banks know that the longer a customer prolongs paying off  debt, the less likely he/she will be able to complete the program.  Also, credit card companies and banks want their money sooner rather than later.  Once you enter a program, it’s a “promise” to the bank that you will pay them in a certain amount of time.  If by chance you renege during the program (which you can, but not recommended), you will be penalized by the banks as they will charge you backed up interest and fees that you should have originally been paying them.

Talk about making a deposit in a third party bank.

Pros of working with a Debt Settlement Firm:

1)      You don’t deal with the credit card companies directly.  Basically you are paying a Debt Settlement firm to take care of it for you.  Usually they charge 2.5% (or whatever they charge these days) upfront that will be taken out of your first several months payment and then when you finish the program they take another haircut of approximately 30% (again whatever they charge these days) of your savings.  So for instance if you had $10,000 of debt, they negotiate it down to $4,000, there is a savings of $6,000 or 60%.  But then the firm takes a cut of 30% of your savings, so they will take another $1,800 (which is already included in our payment schedule so it’s not anything out-of-pocket).  In reality you save $4,200 or 42%.

2)      You are debt free within 36 months.

3)      You have empowered yourself and created your financial freedom – that’s what they like you to think.

Cons of working with a Debt Settlement Firm:

1)      More than likely your credit score will be negatively affected.  For instance if you have a 700 FICA score, it will drop into the high 500s.  If you already have a 500 credit score, then it really won’t change.  Reason being is that when you sign up for a program, you will stop paying the credit cards on the balances.  As a result, to the banks, you have defaulted on your unsecured debt.  They report this to the credit bureaus and there will be statement on it that you have defaulted with X Company.

2)      The customer service is sub par.  Once you have signed up, the representative throws you into “the dog pound” with all the other clients.  There will be another client service representative that will be corresponding with you afterwards.  Unfortunately, these companies are understaffed and do not get back with you in a timely manner.  The industry is changing and some companies have been touting that if you call, the client service rep has x amount of hours to call you back or they are disciplined/fired.  Do you think this really happens if they are already understaffed?

3)      You cannot participate in a program if you have some government jobs.  For instance if you have like a Top Secret clearance or have access to classified information, then this may be conflicting with your job agreement.  Also, once your credit score drops and you are applying for a job, employers frown upon you being financially irresponsible.

4)      The government will tax the savings that you have accumulated throughout the DS process.

5)      There is still the possibility of the Credit Card company suing you.  I have heard horror stories.  It’s a small percentage, but has become more widely adopted.

6)      The Better Business Bureau (who really doesn’t do anything) have negative ratings about Debt Settlement Firms.  The rumors are that the BBB was created by the giants that are collecting money from you, but who knows.

The reality of it all:

You have several different options that are pretty much similar.

1)      Debt Settlement.  Again DS firms negotiate on your behalf to reduce your total unsecured debt by approximately 50%.  You are only paying on the principal amount of your debt.  NOT paying any interest.

2)      Consumer Credit Counseling.  They help you lump your credit card payments into one (just like Debt Settlement), but reduce your interest rates.  For instance, CCC will lower your interest rates from 20% to 13% on a $10,000 debt.  You are paying both the principal amount of $10,000 AND interest.  There are instances where CCC can reduce your debt load.  In these instances your credit score will be negatively affected.

3)      Declare Bankruptcy.  If you can’t pay your bills, can’t live off the money you currently make/have, then you should declare bankruptcy.  There are two types for individuals.  Most people file Chapter 7: basic liquidation for individuals.  This is also known as straight bankruptcy; it is the simplest and quickest form of bankruptcy available.  This clears all of your debt, but a record of this stays on the individual’s credit report for up to 10 years.  If you do not qualify for this, you will be subject to Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income.  Basically if you are above the income limits stipulated, then you are required by the courts to develop a plan to repay all of your debts with a 3-5 year time frame. This record stays on the individual’s credit report for up to 10 years.  It is important to note that when applying to jobs, employers usually ask if you have ever declared bankruptcy and usually check your credit report.  So depending on your situation, you really have to think about this option.

4)      DO IT YOURSELF.  This is by far the best choice, but requires YOU to change and become financially responsible.  Why pay a Middle Man when you can do it yourself.  I know, I know, you are going to say “It’s too much work”, which really means you are just lazy.  YOU are the one that overextended your credit. NOT ME! The best way to combat your unsecured debt is to first start saving $ in another bank account that is dedicated to pay off your debt.  In the meantime, call your credit card company and ask what they can do to help you.  More than likely, if you have been paying the minimum payments on your bills on time, they will tell you they can’t help you.  Why would they when you are constantly making the minimum payments, and thus more money in the bank’s pocket (interest upon interest upon interest).  In reality, you will have to stop paying the credit card bills for a couple of months, just like at a DS (Note that this will negatively affect your credit score).  Note, don’t stop paying all your credit cards at the same time because once you stop paying your bill, that credit card company will cut you off from using that credit card.  Other CCs will follow.  But this is a good thing, because credit cards are what got you into trouble in the first place).  I suggest you attack the credit card with the lowest principal, so that you can get that out of your way and feel like you accomplished something as it will be paid off sooner. Just like a TO DO LIST.  Once you stop paying your bills, the CC companies realize you have some kind of “hardship”, that you cannot afford to pay your bills.  After a couple of months of not paying your bills, call the CC company and let them know that you cannot pay the bill.  Threaten that you will declare bankruptcy (Then they will think you are serious that you can’t pay your bills, when you declare BK, a bank gets $0).  They will run around like chickens with their heads cut off.  Consequently, ask them to reduce your debt load.  If you owe $10,000 mention to them that you can come up with $2k in a month (don’t tell them that you have money saved).  They will counter your offer with $7,500.  This is the negotiating process, you have to low ball them at first.  In the back of your mind, since you have been saving over the past couple of months you know you have $5,000 saved.  When you think an amount is fair (30-50% is fair), then agree with the CC company that you will pay them x amount within y months.  GET THE AGREEMENT IN WRITING and make sure that you have them remove the default statement from your credit report.  Tell them to replace it with PAID IN FULL or something to that extent.  After about a year of  all your credit cards being paid off, your credit score will start to rebound and be back to where it used to be.

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