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Debt Settlement

The numbers tell us that approximately 9 million Americans have reached out to the organizations that can help them resolve outstanding debt. And one of the strategies that these organizations employ is debt settlement.

Many states carefully regulate processes such as debt settlement. In South Dakota, the work of what are sometimes broadly categorized as debt adjusters is a slightly more complicated matter.

The state restricts "debt adjustment, budget counseling, debt management, [and] debt-pooling" services, but it doesn't specifically mention debt settlement (and/or credit counselors) in the list of restrictions. And South Dakota leaves the door open to certain kinds of organizations — nonprofits, for example — as outlined in this part of the statute that covers the topic. In many cases, agencies must pay a bond to the state.

So, how can you assure yourself that an agency offering debt settlement is approved to provide it in South Dakota? One way is to start with the U.S. trustee Program, operated by the Department of Justice. You can check that the agency with which you deal is listed here. (You'll notice that the organizations don't have to be actually headquartered in the state for the federal government to still approve their services in South Dakota). You can also contact the state Attorney General's office and ask about the service with which you're dealing. 

When to Use It

Debt settlement is an option for individuals who want to put their creditors behind them, once and for all. It's one way to build a better credit score. Note, however that while credit counseling in general is a prerequisite when one files for Chapter 7 or Chapter 13 bankruptcy, debt settlement is not. This is a strategy that focuses on paying off the bill. 

How It Works

Debt settlement is handled by a third party, in this case a federally-approved credit counselor. The agency negotiates a one-time payment that is less than what's owed to the creditor. You send the agreed-upon sum to the organization and they give it to the debtor.

As of 2010, South Dakotans engaged in debt settlement plans also have protection from the Federal Trade Commission. They should not be required to pay an upfront fee for services. Debt settlement agencies have to show their clients the plan and the actual reduction of debt. And debtors can't be charged a fee until the organization has made the (first or total) promised payment to the creditor.

Be certain to find out up front how much your agency assesses for services. Also, take into account that the amount forgiven under a debt settlement plan is almost always treated as taxable income.

Credit Counseling

The South Dakota Attorney General encourages residents to only use legitimate credit counseling services to avoid credit repair fraud. According to the South Dakota Attorney General, “You should avoid any credit repair solicitations that you receive. Companies coast to coast appeal to consumers with poor credit histories, promising to clean up credit reports for a fee. After you pay them hundreds or even thousands of dollars in upfront fees, they can do nothing to improve your credit. Only time, a conscious effort, and a personal debt repayment plan will improve your credit report. No one can legally remove accurate and negative information from a credit report. Everything a credit repair company can do for you legally, you can do for yourself at little or no cost.”

Make It Work for You

Find a Counselor

Since South Dakota residents have been victims of credit counseling scams in recent years, the Attorney General cautions residents to find a legitimate credit counselor. The National Foundation for Credit Counseling maintains a list of member organizations in South Dakota that meet specific standards.

Discuss Fees and Process

“Any setup fee or monthly fee should be reasonable, usually defined as $50 or less, with monthly fees in the $25 range. The agency should be willing to waive all fees in cases of true hardship,” according to the National Foundation for Credit Counseling.

Communicate

Meet with your credit counselor and provide information about your financial situation. Your counselor may provide advice or recommend a financial management course. Another option is a Debt Management Plan, where the agency negotiates with your lenders and pays your creditors directly. 

Follow Their Advice

Follow the advice of your credit counselor and work to make lasting changes in your financial situation. Keep documentation of all credit counseling services and paperwork in case you need the information in the future.

Remember: If you find an agency that is not following South Dakota law, download a copy of the complaint form from the South Dakota Attorney General website, fill it out and mail it to the office. Be sure to include any relevant documentation with your complaint.