“Debt settlement is specifically aimed at encouraging people to not pay their debts in hope that the company can reduce the debt load,” said Ellen Harnick with the nonprofit, nonpartisan Center for Responsible Lending. “The problem is that hope is very often not realized and certainly not realized for all of the debts the person has now just defaulted on.” Harnick said a debt settlement provider may point out that the company only gets paid if it settles a debt. The consumer would get final approval on a settlement offer. Harnick said there’s a risk consumers will see other penalties add up, which would wipe out any potential savings on a settled debt. “What they call savings might be they've reduced… a reduction on the one debt,” said Harnick. “Even though your total debt load you enrolled with them hasn't gone down at all. In fact, it's higher. You're more in debt than when they started.” Harnick said consumers should be clear about any potential tax impacts for settled debts. A debt reduction may be counted as taxable income.
