What are debt settlement companies?

Debt settlement companies say they can lower the amount of debt you owe by negotiating with your creditors. They make money by charging fees for their services, and the fees can be high. 

How debt settlement works

Here's what usually happens under a debt settlement plan:

• You stop making payments to your creditors.
• Instead, you send money to a special account managed by the debt settlement company.
• When there's enough money in that account, the debt settlement company will try to settle your debts for less than the full amount.

Risks of debt settlement

Debt settlement programs can have serious consequences.

• Your debt may grow. While you're not paying, your creditors may add interest and late fees to your debt.
• Your credit score may drop. Even one missed payment can hurt your credit. A 30-day late payment could lower your credit score by 100-125 points.
• Not all creditors will work with debt settlement companies. Some may refuse to negotiate with a debt settlement company.
• You may still get collection calls. Since you've stopped paying, your creditors may continue trying to collect the debt.
• You could get sued. While you are saving up, a creditor may take you to court. If that happens, it can be harder to settle for a big discount because the creditor has paid court costs and legal fees.

Example: How debt settlement works in practice

Let's say you owe $10,000 on a credit card and use debt settlement. That company charges 25% of the total debt as its settlement fee.

• The debt settlement company negotiates a deal where the credit card company agrees to take $6,000 as full payment.
• That sounds like $4,000 in savings, but the debt settlement company takes $2,500 as its fee.  
• You end up saving only $1,500.  

💡You may be able to save more money by contacting your creditor directly and trying to settle the debt yourself. 

Special protections in Illinois

Under Illinois law, debt settlement companies must be licensed, warn you about the downsides of debt settlement, and limit their fees. This law does not apply to law firms offering debt settlement services.

This law is called the Debt Settlement Consumer Protection Act. It applies to debt settlement companies but not law firms offering debt settlement services.

If you are considering debt settlement, make sure that the debt settlement company is following the law. 

Debt settlement companies must be licensed

Only licensed companies can offer debt settlement. 

As of July 2025, only 4 companies were licensed debt settlement companies by the Illinois Department of Financial and Professional Regulation (IDFPR).  

You should check if a debt settlement company is licensed before working with them. To search, select "Collection Agency" from their list.

Debt settlement companies must limit their fees

Debt settlement companies cannot charge more than:

• An initial fee of $50, and
• A settlement fee of 15% of the amount saved on each settled debt.

They can't charge you a settlement fee until the debt is actually settled.  

You must get a written financial review before signing up

Before you enter a contract, the debt settlement company must give you a written financial analysis that shows:

• Your income and expenses,
• Your total debt,
• A realistic timeline for settling your debts,
• Your target savings amount, and
• Whether you can afford the plan. 

This helps you decide if debt settlement is right for you. 

You can cancel anytime

You have the right to cancel your contract at any time. If you cancel, you must get:

• A refund of all unearned fees,
• Any money you paid into your savings account that hasn’t been used to pay creditors, and
• An immediate stop to any powers of attorney you gave the company.

Read the fine print before signing any contract

Before you sign a contract, you must receive a clear warning in writing that includes:

• The risks of debt settlement (like lawsuits, credit score damage, and fees)
• Your right to cancel at any time
• Where to go if you need help or want to file a complaint

Read any contract carefully before using a debt settlement service.

If a debt settlement company breaks the law

You can file a complaint with the:

• Illinois Department of Financial and Professional Regulation (IDFPR) or
• Illinois Attorney General’s Office. 

The state can fine the company, revoke its license, or go to court to shut it down

You may also sue the company under the Illinois Consumer Fraud and Deceptive Business Practices Act and the Illinois Debt Settlement Consumer Protection Act. A consumer lawyer can help you decide if this is a good option for you.