After you fall behind in payments for your unsecured debts—like credit card, department store, and medical debts—your creditors might send the debts to various collection agencies. Creditors hire these third-party companies to hound you for the money you owe. (Learn what you should expect if your debt goes to collection.)

If you find yourself in this situation, you might be considering hiring a debt settlement company to help you negotiate with your creditors and their collectors. Debt settlement companies claim that they can convince your creditors to settle your credit card or other unsecured debts in full by offering lump-sum payments that are less than the total amounts you owe. Debt settlement companies often claim they can cut your debts in half—or perhaps even more. Of course, debt settlement companies charge significant fees for these services.

Unfortunately, debt settlement companies—and the people who work for them—can be scammers. They might provide little or no help after you've paid them and, even if the company does negotiate your debts down, you’ll be paying for services that you could have done yourself or would have better off paying to a legitimate credit counseling company or a lawyer.

Debt Settlement Companies: The Basics

You won’t get free or low-cost help from a debt settlement company. Debt settlement firms—unlike some consumer credit counseling agencies—are for-profit companies.

How Debt Settlement Companies Work

A debt settlement company will likely tell you to stop making payments to your creditors and instead, make the payments to them while your debts are being negotiated. The monthly payments you send to the debt settlement company cover:

• the hefty fee for the debt negotiation services, and
• your savings, which are set aside for future settlements of your debts as negotiated by the debt settlement company.

The debt settlement company might also charge a contingency fee, which is a percentage based on any amounts saved through settlement.

Signs of a Scammer Company

If a debt settlement company makes any of the following claims, it’s most likely a scammer.

• The company guarantees your unsecured debts will be paid off at less than half their value.
• The company charges large monthly service fees.
• The company insists that communications to your creditors go through them and won’t allow you to make direct payments to your creditors.
• The company assures you that you won't face creditor lawsuits.
• The company assures you that their services will improve or have no negative impact on your credit report.
• The company claims that they can remove negative information from your credit report—even if it’s accurate.

Avoid Getting Scammed

A debt settlement company might charge high fees for services you could do yourself, drop the ball when it comes to negotiating with your creditors, or simply take off with your money. During the time it takes the debt settlement company to work with your creditors—or for you to figure out you’ve been scammed—you could get hit with late fees and penalty interest charges. Even if the debt settlement company manages to settle one or more of your debts, you might end up with more debt than you had initially. Besides, creditors and debt collectors often refuse to negotiate with debt settlement companies. They might even step up their efforts to collect from you by filing a lawsuit, for example.

In almost all cases, you’re better off negotiating on your own and using the money you would have paid to the debt settlement company to make payments to your creditors or to hire legitimate help. (To get tips on how to negotiate with creditors on your own, see How to Negotiate a Credit Card Debt Settlement: The Process.)

Get Help From a Legitimate Credit Counseling Agency or a Lawyer

If you need help managing your debts or negotiating with your creditors or debt collectors, consider talking to an accredited, nonprofit credit counseling agency or a reputable lawyer rather than hiring a for-profit debt settlement company. You might even qualify for free or low-cost help.

Using an Accredited, Nonprofit Credit Counseling Agency

Consumer credit counseling agencies are typically nonprofit organizations that offer help in managing unsecured debts. A consumer credit counselor can:

• go over your current financial situation
• help you to come up with a budget that manages your finances, and
• in some cases, develop a personalized plan—called a debt management plan—to deal with your debts, though the agency will likely charge a fee for this service.

To ensure that you’re dealing with a legitimate credit counseling agency:

• Look for a company that’s accredited by the Council on Accreditation (COA) or the International Organization for Standardization (ISO).
• Contact a Consumer Credit Counseling Service (CCCS) agency, which is a member of the National Foundation for Credit Counseling (NFCC), and is accredited by the COA.
• Ask if an independent agency certifies the counselors who work for the agency. If certified, this means they’ve passed a certification exam that tests for competency in areas like counseling, budgeting, credit and consumer law, debt management, and bankruptcy.
• Check with your state attorney general’s office, the Better Business Bureau, and local consumer protection agencies to make sure the agency hasn’t been the subject of consumer complaints.

Getting in Touch With a Lawyer

A debt relief lawyer can help you negotiate settlements with your creditors. (Keep in mind that if you settle a debt for less than you owe, you might face tax consequeneces. The IRS generally considers canceled debt of $600 or more as taxable, though exceptions to this rule exist.) A lawyer can also defend you against collection lawsuits. (To learn more about why it's usually better to hire a lawyer to negotiate with your creditors—or work to settle them on your own—rather than hiring a debt settlement company, see Nolo’s article Lawyer vs. Debt Settlement Company: Which Should I Use?)

You might also want to consider filing for bankruptcy to discharge (eliminate) your unsecured debts rather than settling them for less than you owe. If you want to find out if bankruptcy might be appropriate in your situation, talk to a bankruptcy lawyer.

Many bankruptcy attorneys and debt relief attorneys offer free consultations and will quote you a fee after evaluating your circumstances.