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Debt Settlement

Washington legislators and the state's attorney general are deeply concerned with how these kinds of plans work, and what follows should help illuminate the rules and regulations surrounding debt settlement, where they exist. You can then decide if debt settlement is a strategy that works well with your financial situation.

Washington’s Laws

The organizations that offer debt management services are widespread. Approximately 9 million Americans reach out to them regularly. And while Washington state law does a lot to protect debtors, the state itself doesn't require the firms to which debt settlement related legislation applies to register with its government offices. Instead, consumers should turn to the U.S. trustee program, which lists the agencies that are federally approved to offer services in the state (they needn't have their headquarters there, however).

Once you've confirmed that an organization is on the list, what follows is an outline of what typically happens under a debt settlement arrangement.

When To Use It

Debt settlement can be a tool to pay off a single debt in a single go. While credit counseling in general is a prerequisite for debtors before they file for Chapter 7 or Chapter 13 bankruptcy, debt settlement is not.

How It Works 

An organization, attorney, or public accountant negotiates a one-time payment with a creditor that is reduced from whatever the full amount is owed. You give your money to the negotiating agency and they give it to the debtor.

Additional Details

Under the Washington Debt Adjusting Act, a third party may only assess a fee to the consumer that does not exceed 15 percent of the total debt settled. Set up fees may not exceed $25. Your debt settlement firm is required to place all of the money that you pay into a trust fund. Your debtors then get the money from that fund. Should an organization violate the Act's terms, all of the money it's holding must be returned to the payer. Furthermore, under the state's Consumer Protection Act, in a civil court the debtor stands to win triple damages for violations. Even given all of these protections read your settlement plan's fine print. If you're working with a lawyer instead of a nonprofit counselor there may be legal and filing fees attached to your plan, and those aren't always limited by the state's provisions. Also, whatever the amount of your total debt that is forgiven under a debt settlement, it's nearly always treated as taxable income.

Washington State has rules that protect consumers all the way through debt-management and debt-settlement, and it has a history of pursuing firms alleged to have violated the terms of the Debt Adjusting Act.

The complete language of the Act is available at the state Legislature's website. If you think something's not right about your debt settlement situation, contact the state Attorney General's office.

Credit Counseling

Many debt-laden consumers will benefit from the discipline, skills and credit knowledge offered by approved credit counselors.

How It Works

According to the Washington State Office of the Attorney General (OAG), “You may overspend, become ill or lose your job, making it difficult to keep up with your bills. Consult with a legitimate credit counselor who will help you develop a personalized money-management plan.”

Regulations concerning credit counseling services in Washington are generally applied under the state’s Unfair and Deceptive Acts and Practices laws and Debt Adjustment statutes. However, no specific licensing is required for credit counseling companies.

“Credit Counseling can be very helpful to people who have high interest credit card debt. Many people make the huge mistake of only making minimum payments," said Howard Dvorkin, a CPA and author of Power Up: Taking Charge of Your Financial Destiny. "I always recommend that the first step should be a call to a creditable credit counseling agency for a free assessment."

Finding a legitimate credit counseling agency that provides a range of services including budget counseling, financial educational courses and personalized debt repayment plans is crucial. Consumers should expect to pay reasonable fees and be aware that many credit counseling agencies receive some funding from creditors. An agency may prepare a debt consolidation or management program designed to pay off debts. The consumer typically deposits money each month with the agency and the agency disburses payments according to arrangements made with creditors.

It probably took years to accumulate the debt, so it will take time to pay it down. Creditors may agree to lower interest rates or waive certain fees if the consumer is working with a reputable program, but it can still take several years to complete the program according to Washington's attorney general's office.

Where To Find Help

The U.S. Department of Justice (DOJ) provides a list of approved consumer credit counseling companies by state and a quick scan will reveal a number of companies that are approved by the department to do business in Washington. The DOJ site also lists consumer credit counseling companies that offer their services in up to 29 languages other than English. While the lists are intended for consumers who are required to have counseling as part of a bankruptcy filing, the DOJ-approved lists can be a useful tool in finding a reputable company.

One of the nation’s oldest consumer advocacy agencies is the National Foundation for Credit Counseling, formed in 1951 as a clearinghouse for information and now serves as a certifying agency with more than 700 member credit counseling agencies listed. 

You may also search by region using the Better Business Bureau (BBB) for Washington credit counseling businesses where you’ll find BBB-accredited business listings and reviews. Ratings range from A+ to F. The BBB rating should be used as a tool rather than an absolute authority.