Dealing With Debt Problems (Continued)

​​​​​​​​Debt settlement programs: 

Debt settlement differs greatly from credit counseling and DMPs. It can be very risky and have a long-term negative impact on your credit report and, in turn, your ability to get credit. Additionally, the FTC’s Telemarketing Sales Rule prohibits companies that sell debt settlement and other debt relief services by phone to charge or collect a fee before they settle or reduce your debt.

Debt Settlement – The Claims

Debt settlement firms may claim they will negotiate with your creditors to reduce the amount you owe. Some debt settlement companies may claim that they can arrange for your debt to be paid off for a much lower amount – anywhere from 30 to 70 percent of the balance you owe. For example, if you owe $10,000 on a credit card, a debt settlement company may claim it can arrange for you to pay off the debt for less, say $4,000. Some debt settlement firms may also claim to be nonprofit.

Debt settlement firms often pitch their services as an alternative to bankruptcy. They may claim that using their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be removed from your credit report when you complete their debt settlement program. The firms usually tell you to stop making payments to your creditors, and instead, send payments to the debt settlement company. The firm may promise to hold your funds in a special account and pay your creditors on your behalf.

Debt Settlement – The Truth

There is no guarantee that the services debt settlement companies offer are legitimate. There also is no guarantee that a creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late fees and interest usually are added to the debt each month. If you exceed your credit limit, additional fees and charges can also be added. This can cause your original debt to double or triple. All these fees will put you further in debt.

While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.

Debt Settlement – Fees

Amendments to the FTC’s Telemarketing Sales Rule prohibit companies that sell debt settlement and other debt relief services on the phone from charging a fee before they settle or reduce your debt.

If you do business with a debt settlement company, you may be required to put money in a dedicated bank account, which will be administered by an independent third party. The account administrator may charge you a reasonable fee and is responsible for transferring funds from your account to pay your creditors and the debt settlement company when settlements occur.

Debt Settlement – Disclosures

Before you sign up for the service, the debt settlement company must give you information about the program's:

  • Price and terms. The company must explain its fees and must tell you about any conditions of its services.

  • Results. The company must tell you how long it will take to get results. That is, how many months or years before the company will make an offer to each creditor.

  • Offers. The company must tell you how much money or what percentage of each outstanding debt you must save before it will make an offer to each creditor.

  • Non-payment. If the company asks you to stop making payments to your creditors – or if the program relies on your not making payments – the company must tell you about the possible negative consequences of doing so.

Note: The above information on debt settlement was provided for educational purposes. Debt settlement companies must be licensed as adjustment service companies to operate in Wisconsin.

Tax consequences

Depending on your financial condition, the amount of any savings you obtain from debt relief services can be considered income and taxable. Credit card companies and others may report settled debt to the IRS, and the IRS considers it income, unless you are "insolvent." You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be complex to determine – please talk to a tax professional if you are not sure whether you qualify for this exception.

Researching companies

If you decide to pay a company to negotiate your debt, do some research. Consider other people’s experiences. One way to do that is to enter the company name with the word "complaints" into a search engine. Read what others have said. You are making a big decision that involves spending a lot of your money that could go toward paying down your debt. When researching a company, we suggest you determine if the company is licensed as an adjustment service company by contacting the Wisconsin Department of Financial Institutions at (608) 264-7969 or visiting the List of Adjustment Service Company Licensees​.

Protect yourself

There are many debt relief organizations that are scams. The following is a list of actions that may indicate an organization could be a scam and should be investigated further or avoided:

  • Charges any fees before it settles your debts.

  • Pressures you to make "voluntary contributions," another name for fees.

  • Touts a "new government program" to bail out personal credit card debt.

  • Guarantees it can make your unsecured debt go away.

  • Tells you to stop communicating with your creditors.

  • Tells you it can stop all debt collection calls and lawsuits.

  • Guarantees that your unsecured debts can be paid off for just pennies on the dollar.

  • Will not send you free information about the services it provides without requiring you to provide personal financial information, such as credit card account numbers, and balances.

  • Tries to enroll you in a debt relief program without spending time reviewing your financial situation.

  • Offers to enroll you in a DMP without teaching you budgeting and money management skills and demands that you make payments into a DMP before your creditors have accepted you into the program.

​​Debt Consolidation

You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. Remember that these loans require you to put up your home as collateral. If you can’t make the payments — or if your payments are late — you could lose your home. What’s more, the costs of consolidation loans can add up. In addition to interest on the loans, you may have to pay “points” with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.

Chapter 128 Debt Consolidation

Chapter 128 of the Wisconsin Statutes provides for a voluntary debt consolidation plan through the Wisconsin Circuit Court system. It is available to any Wisconsin resident that has a steady source of income such as wages or disability benefits. Chapter 128 is not a bankruptcy, but it provides some of the same kinds of legal protections against creditors as bankruptcy, such as stopping credit cards and many other kinds of interest, and it stops garnishments and utility shutoffs. Under Chapter 128 your debts are not discharged. The purpose of Chapter 128 is to help you pay off your debts in full by allowing you to pay the debts in a manner that is more manageable.  Chapter 128 debt repayment plans cannot be longer than three years. Secured debts, such as car loans and home mortgages, cannot be included in Chapter 128. Chapter 128 only covers unsecured debts such as medical bills, payday loans, credit cards, utility bills, etc. You can pick and choose which of your unsecured debts you want to include in your Chapter 128.


Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. People who follow the bankruptcy rules receive a discharge — a court order that says they don't have to repay certain debts. However, bankruptcy information (both the date of your filing and the later date of discharge) stays on your credit report for 10 years and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. Still, bankruptcy is a legal procedure that offers a fresh start for people who have gotten into financial difficulty and can't satisfy their debts. There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court.  Filing fees are several hundred dollars. For more information visit​. Attorney fees are additional and can vary.

Chapter 13 allows people with a steady income to keep the property, like a mortgaged house or a car, that they might otherwise lose through the bankruptcy process. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts during a three-to-five-year period, rather than surrender any property. After you have made all the payments under the plan, you receive a discharge of your debts.

Chapter 7 is known as straight bankruptcy and involves the liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools, and basic household furnishings. Some of your property may be sold by a court-appointed official — a trustee — or turned over to your creditors. You must wait 8 years after receiving a discharge in Chapter 7 before you can file again under that chapter. The Chapter 13 waiting period is much shorter and can be as little as two years between filings.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments and utility shutoffs, and debt collection activities. Both also provide exemptions that allow people to keep certain assets, although exemption amounts vary by state. Note that personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. And, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it.

You must get credit counseling from a government-approved organization within six months before you file for bankruptcy relief. You can find a state-by-state list of government-approved organizations at​. That is the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees. Also, before you file a Chapter 7 bankruptcy case, you must satisfy a “means test." This test requires you to confirm that your income does not exceed a certain amount. The amount varies by state and is publicized by the U.S. Trustee Program at

Damage Control

Turning to a business that offers help in solving debt problems may seem like a reasonable solution when your bills become unmanageable. But before you do business with any company check it out with the Wisconsin Department of Financial Institutions and the Better Business Bureau (BBB)​. Prior to choosing a business to work with, contact the Department.  We can tell you if any consumer complaints are on file.

Some businesses that offer to help you​ with your debt problems may charge high fees and fail to follow through on the services they sell. Others may misrepresent the terms of a debt consolidation loan, failing to explain certain costs or mention that you're signing over your home as collateral. Businesses advertising voluntary debt reorganization plans may not explain that the plan is a bankruptcy filing, tell you everything that's involved, or help you through what can be a long and complex process.

In addition, some companies guarantee you a loan if you pay a fee in advance. The fee may range from $100 to several hundred dollars. Resist the temptation to follow up on these advance-fee loan guarantees. They may be illegal. Legitimate creditors never guarantee that the consumer will get the loan — or even represent that a loan is likely. Under the federal Telemarketing Sales Rule, a seller or telemarketer who guarantees or represents a high likelihood of you getting a loan or some other extension of credit may not ask for or accept payment until you've received the loan.

You should be cautious of claims from so-called credit repair clinics. Many companies appeal to consumers with poor credit histories, promising to clean up credit reports for a fee. But you already have the right to have any inaccurate information in your file corrected. And a credit repair clinic cannot have accurate information removed from your credit report, despite their promises. You also should know that federal and some state laws prohibit these companies from charging you for their services until the services are fully performed. Only time and a conscientious effort to repay your debts will improve your credit report.

If you're thinking about getting help to stabilize your financial situation, do some homework first. Find out what services a business provides and what it costs, and don't rely on verbal promises. Get everything in writing, and read your contracts carefully before signing.​

Re-establishing Credit

Re-establishing a good credit rating is not easy, but with hard work and perseverance, it can be done. The best way to start is to establish a checking and savings account with your local financial institution. Often a smaller community bank, savings, and loan or credit union will be more able to help you because their lending policies may be more flexible. Make sure to regularly deposit money into both accounts and never overdraw on either. Build a good relationship and a solid account history with them. You can then sit down with them and discuss your situation. Be honest regarding your past, but also highlight the effort you have put forth on your accounts with them. They may be willing to grant you a loan. You have then taken the first step to regaining good credit.

​Although this method takes time, it is the best way for people to rebuild damaged credit. There is no quick way to fix credit, so be careful about responding to organizations who claim to be able to fix your credit overnight, or ask you to pay a fee for assisting you in obtaining credit. It doesn’t work that way.​

Contact Us

Phone:  (608) 264-7969
Toll-Free:  (800) 452-3328 (in Wisconsin)
Fax:  (608) 264-7968