Ellen Harnick and Leslie Parrish
Debt settlement companies purport to offer debt-burdened consumers a way to become debt-free
while paying substantially less than what they owe, particularly on their credit cards. But debt
settlement can be risky; for many consumers, it is not the solution it is marketed to be. All too
often, far from becoming debt-free, debt settlement clients are in fact left in a worse financial
position than where they started.
This study analyzes recent data published by the debt settlement trade association to determine
whether debt settlement services are on balance beneficial to consumers. The data point to two
(1) C onsumers must settle at least two-thirds of their debts to improve their financial
position through debt settlement. Using conservative assumptions, on average, consumers
must settle at least two-thirds (four of six) of their debts to be in a better financial position
than they were at the time of enrollment in the debt settlement program. Consumers who
incur tax liability or other costs, are unable to complete all installment payments on their
settlements, or are sued by one or more of their creditors may not benefit even if they settle
nearly all of their debts.
(2) It is difficult (if not impossible) for consumers to predict their likelihood of completion
ahead of time. Consumers are unable to fully evaluate the risk factors that affect the number
of debts that can be settled (if any). Thus, an individual considering a debt settlement
program cannot accurately gauge whether debt settlement services will leave her debt-free,
result in some benefit while still leaving some debts unsettled, or leave her worse off than
she was at the time she began the debt settlement program.