Law Office of D.L. Drain, PA

09/13/2026

Debt Settlement Can Wreck Your Credit — Even If You’re Paying on Time
Thinking About Debt Settlement? Read This Before You Stop Paying
Debt settlement may sound like an easier and safer choice than bankruptcy.

You have probably seen the ads:

“Pay only a fraction of what you owe.”
“Avoid bankruptcy.”
“Lower your monthly payments.”
“Get out of debt.”
Those promises can sound very attractive when money is tight.

But before you sign up, there is something very important you need to know:

Debt settlement warningDebt settlement can seriously damage the credit you are trying to protect.
New TransUnion research found that enrollment in third-party debt settlement was linked to major credit-score declines. The decline was especially large among consumers who were still current on their debts before entering debt settlement.

What Did TransUnion Find?
TransUnion is one of the three major nationwide credit reporting companies.

In August 2026, TransUnion published research comparing consumers who entered third-party debt settlement programs with consumers who filed bankruptcy.

One group stood out:

Consumers who were still current on their debts when they entered debt settlement.

Their median VantageScore 4.0 was:

645 — six months before debt settlement

582 — when they entered debt settlement

549 — six months later

That is a 96-point decline from six months before enrollment to six months after enrollment.

TransUnion also looked at consumers who filed bankruptcy.

Their median score was:

582 — six months before bankruptcy

556 — when bankruptcy was filed

562 — six months later

That was a 20-point decline from six months before bankruptcy to six months afterward.

Does That Mean Bankruptcy Only Hurts Your Credit by 20 Points?
No.

That would be an incorrect conclusion.

Many people who file bankruptcy have already suffered credit damage before they file.

They may already have:

missed payments,
collection accounts,
charged-off debts, or
lawsuits.
That helps explain why the bankruptcy group started with a lower median credit score.

The TransUnion research does not prove that everyone who enters debt settlement will lose 96 points.

It also does not mean everyone who files bankruptcy will lose only 20 points.

What the research does show is important:

Consumers who were current when they entered debt settlement experienced a very large decline in their median credit score.
That should cause anyone considering debt settlement to stop and ask questions before deliberately stopping payments.

Why Can Debt Settlement Hurt Your Credit?
Many people are surprised to learn how debt settlement works.

A debt-settlement company may tell you to stop paying your credit cards and other creditors.

Instead, you may be told to put money into a separate account.

The hope is that, after you have fallen behind and enough money has accumulated, your creditors will agree to accept less than you owe.

But while you wait for a settlement, several things may happen.

Your accounts can become late.
A credit card that is current today can become 30 days late.

Then 60 days late.

Then 90 days late.

Those missed payments can damage your credit.

Interest and late fees may keep growing.
Stopping your payments does not make the debt disappear.

The balance may actually get larger while you wait.

Your accounts may be sent to collections.
Your creditor may begin stronger collection efforts or send the account to a debt collector.

Your creditor may sue you.
Being enrolled in a debt-settlement program does not stop a creditor from filing a lawsuit.

The Consumer Financial Protection Bureau warns that debt-settlement companies typically encourage consumers to stop paying their credit card bills. The CFPB says this can result in late fees, penalty interest, increased collection efforts, lawsuits and damage to credit scores.

The Federal Trade Commission gives similar warnings. The FTC says debt-settlement programs often encourage consumers to stop making payments and that consumers may face growing interest and fees, collection calls, lawsuits and damage to their credit.

You Could Be Current Today—and Delinquent Tomorrow
This is one of the most important issues for consumers who are still paying their bills.

Imagine that today you have:

no missed credit card payments,
no collection accounts,
no creditor lawsuits, and
a decent credit score.
Then you enter a debt-settlement program.

The company tells you to stop paying several credit cards.

A few months later, several accounts may show late payments.

Your balances may be growing.

Collection calls may have started.

One or more creditors may even be considering a lawsuit.

The very plan you chose because you wanted to protect yourself from financial problems may have created new ones.

This does not mean every debt-settlement program has the same result.

It does mean you should understand exactly what will happen before you stop paying debts that are currently being paid on time.

Your Creditors Do Not Have to Settle
This is another fact that consumers need to understand:

A debt-settlement company cannot force your creditors to accept a settlement.
Your creditor can say no.

The CFPB warns that some creditors may refuse to work with a debt-settlement company and that the company may not be able to settle all of a consumer’s debts.

The FTC also warns that creditors have no obligation to negotiate a settlement.

Meanwhile, debts that are not being paid may continue to grow because of interest, late fees and other charges.

Debt Settlement Does Not Stop a Creditor From Suing You
Signing a contract with a debt-settlement company does not create legal protection from your creditors.

While you are waiting for settlements, creditors may continue collection efforts.

They may also sue.

The CFPB specifically warns that working with a debt-settlement company may lead to a creditor filing a debt-collection lawsuit.

The FTC warns that a consumer can be sued while waiting for a settlement. If a creditor obtains a judgment, additional collection remedies may be available under applicable law.

That is one important difference between debt settlement and bankruptcy.

Bankruptcy and Debt Settlement Are Very Different
Debt settlement and bankruptcy are not two versions of the same process.

Debt settlement is a private negotiation.

A company tries to persuade your creditors to accept less than they are owed.

The creditors can refuse.

Bankruptcy is a federal legal process.

When a bankruptcy petition is filed, an automatic stay generally takes effect.

The United States Courts explains that the automatic stay stops most collection actions. While the stay is in effect, creditors generally may not start or continue lawsuits, wage garnishments or collection calls.

There are important exceptions, and the stay can be limited in certain circumstances.

A debt-settlement company cannot give you an automatic stay.

This difference can be extremely important if you are already facing lawsuits, garnishments or other serious collection problems.

Debt Settlement May Also Create a Tax Problem, which is rarely a problem in bankruptcy.
Suppose you owe a credit card company:

$20,000

The creditor agrees to accept:

$10,000

and cancels the remaining:

$10,000

You may think you simply saved $10,000.

But there may be a tax issue.

The IRS says that when a debt for which you are personally liable is forgiven for less than the full amount owed, the canceled amount is generally included in income unless an exception or exclusion applies. This does not apply in most bankruptcy cases.

There are important exceptions.

For example, the IRS provides an exclusion for qualifying insolvency. Debt canceled in a Title 11 bankruptcy case is also excluded from income when the IRS requirements are met.

So the tax result depends on the facts of each person’s situation.

The important lesson is simple:

Do not assume that forgiven debt has no tax consequences.
Does This Mean Debt Settlement Is Always Wrong?
No.

Every person’s financial situation is different.

Debt settlement may make sense for some people.

But you should not choose it simply because an advertisement makes it sound easier, safer or less harmful than bankruptcy.

Before deliberately stopping payments on debts that you are currently paying, learn about all of your choices.

Those choices may include:

working directly with the creditor,
asking for a hardship program,
negotiating your own settlement,
nonprofit credit counseling,
a debt-management plan,
bankruptcy, or
another solution that fits your financial circumstances.
The FTC specifically points out that consumers can try negotiating directly with creditors instead of paying a company to do it for them.

The CFPB also recommends considering alternatives, including nonprofit credit counseling and speaking with a bankruptcy attorney about your legal options.

Before You Stop Paying Your Credit Cards, Ask These Questions
Before entering a debt-settlement program, ask:

Are you telling me to stop paying my creditors?
What will happen to my credit if I stop paying?
Can my creditors sue me while I am in your program?
What happens if a creditor refuses to settle?
Will interest and late fees continue to grow?
How much will I pay the debt-settlement company?
How long is the program expected to take?
What happens if I cannot afford to finish the program?
What happens to debts that are never settled?
Could forgiven debt create a tax problem?
Have I compared debt settlement with bankruptcy and my other choices?
Do not make one of the most important financial decisions of your life based only on an advertisement or a salesperson’s promises.
The Bottom Line: Understand the Risk Before You Stop Paying
The 2026 TransUnion research raises an important warning about debt settlement.

Among consumers who were current when they entered debt settlement, the median VantageScore fell from 645 six months before enrollment to 549 six months afterward.

That is a 96-point decline.

The bankruptcy group studied by TransUnion experienced a 20-point decline during the comparable period.

Those numbers do not prove that bankruptcy is always better.

They do not mean debt settlement is always wrong.

And they do not predict exactly what will happen to any one person’s credit score.

But they challenge an important assumption:

Debt settlement is not automatically the safer way to protect your credit and avoid bankruptcy.
If you are still paying your bills on time, be especially careful before anyone tells you to deliberately stop paying them.

Understand what can happen before you stop paying.

Once payments stop, late-payment reporting, growing balances, collection efforts and the possibility of lawsuits can follow.

Learn about all of your options first.

Then make the choice that makes sense for your financial situation.

Sources
TransUnion — August 27, 2026:
Debt Settlement Enrollment Linked to Greater Credit Score Declines Than Bankruptcy, New TransUnion Research Finds.

Consumer Financial Protection Bureau:
What Is a Debt Relief Program, and How Do I Know If I Should Use One?

Federal Trade Commission:
How To Get Out of Debt—Debt Settlement.

Internal Revenue Service:
Publication 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments.

United States Courts:
Chapter 7 — Bankruptcy Basics.

The Federal Trade Commission warns that debt-settlement programs may encourage people to stop making payments. The FTC warns that this can damage credit, increase interest and penalties and expose consumers to collection activity and lawsuits.

Source: Federal Trade Commission — How To Get Out of Debt

The Consumer Financial Protection Bureau gives a similar warning. It explains that debt-settlement companies may ask consumers to stop paying their debts and warns that doing so can hurt credit, increase the amount owed, and lead to lawsuits.

Source: Consumer Financial Protection Bureau—What Is a Debt Relief Program?

Articles:

Three Most Misunderstood Reasons Why People Do Not File Bankruptcy

Thinking About Bankruptcy, Do Not Let These Myths Make Things Worse

Beyond Bankruptcy Paperwork—It's Not Just Filling Out Forms, Understanding Attorney’s Role

06/29/2026

Three Misunderstood Reasons People Decide Not to File Bankruptcy.

For many people, bankruptcy becomes a consideration only after years of financial strain. They may rely on credit cards for ordinary living expenses, make minimum payments that barely reduce their balances, borrow from relatives, or withdraw retirement savings simply to remain current.

Bankruptcy does not provide the right solution in every situation. It can affect property, credit, taxes, pending litigation, co-signers, and future financial choices. But many people reject bankruptcy because they rely on overstated fears or incomplete information.

06/28/2026

Worried about losing your tax refund when you file bankruptcy in Arizona? Arizona law may protect the part of your refund that comes from the Earned Income Tax Credit and Child Tax Credit. Learn what may be protected, what a trustee may claim, and why timing matters before you file.

06/28/2026

What are the dangers with Merchant Cash Advances "MCA's"?

06/26/2026

Bankruptcy Myths explored. Thinking about bankruptcy—see this YouTube video:

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06/25/2026

Financial problems usually begin long before a missed payment. A high credit score can hide a difficult reality.

09/24/2025

Sep 9, 2025 9:15 AM Eastern Daylight Time

Diane L. Drain, Esquire, to Receive the 2025 American Inns of Court Bankruptcy Distinguished Service Award

ALEXANDRIA, Va.--(BUSINESS WIRE)--Diane L. Drain of the Law Office of D.L. Drain LP has been selected to receive the prestigious 2025 American Inns of Court Bankruptcy Distinguished Service Award, which recognizes a judge or attorney specializing in bankruptcy law who has exhibited ongoing dedication to the highest standards of the legal profession, the rule of law, and personal ethics and integrity. Drain will receive the award at the National Conference of Bankruptcy Judges in Chicago in September.

“I can attest to Diane’s dedication and commitment to pro bono service, and our entire Arizona legal aid community has benefited from Diane’s ongoing contributions to the field of bankruptcy,” writes Sharon E. Sergent, executive director of Community Legal Services (CLS), who nominated Drain on behalf of CLS and the Volunteer Lawyers Program (VLP). “Even more importantly, Diane has served a myriad of clients who are so desperate for legal assistance through her ongoing pro bono service as a CLS/VLP pro bono attorney, her creation and dedication to serving pro se litigants at the Self-Help Center at the Arizona Bankruptcy Court, her never-ending mentorship, and her willingness to teach and train attorneys and assist clients by representing them directly or assisting them with representing themselves.”

Drain earned her undergraduate degree in criminal justice from Arizona State University in 1983, then earned her law degree from the University of Arizona Law School in 1985. Before law school, she spent 15 years as a paralegal and law office administrator. Drain founded her law firm in 1990 after working at a large firm and specializes in debtor bankruptcy rights, with an expertise in Arizona foreclosure.

Drain developed the Volunteer Lawyers Program at the Arizona Bankruptcy Court and provides pro bono services to CLS/VLP clients as well as offering bankruptcy-related webinars to the public. She and another consumer bankruptcy attorney also established a mentoring group of approximately 100 consumer bankruptcy attorneys; called the Arizona Consumer Bankruptcy Counsel. The organization is actively involved in mentoring consumer bankruptcy attorneys, education programs for attorneys, the bankruptcy court staff and Arizona consumers, and making legislative changes to protect consumers.

In 2023, Drain received a Bankruptcy Attorney of the Year award from CLS/VLP. That year, she also received a Foundation for Justice award for giving her time and expertise to change the justice system to promote access and opportunity for the most vulnerable.

The American Inns of Court, headquartered in Alexandria, Virginia, inspires the legal community to advance the rule of law by achieving the highest level of professionalism through example, education, and mentoring. The organization’s membership includes nearly 30,000 federal, state, and local judges; lawyers; law professors; and law students in more than 360 chapters nationwide. More information is available at www.innsofcourt.org.

Contacts

American Inns of Court
Contact: Cindy Dennis
Awards & Scholarships Coordinator
(571) 319-4703
[email protected]

06/25/2025

Shame Due to Money Problems Can Make Everything Worse
Created On June 25, 2025

family struggling with chains of stress, debt and shame.

Money Problems Lead to Shame, Which Leads to Making Bad Decisons
Money problems are hard enough on their own—but what if the way we feel about our finances is actually making things worse?

A groundbreaking study published in the Journal of Economic Psychology by researchers Gladstone, Ly, Wilcox, and Mazar reveals a troubling emotional trap: shame doesn’t just follow money problems—it fuels it. Their work identifies a powerful cycle called the financial shame spiral, where people’s embarrassment or self-blame about money leads them to avoid their finances, make worse decisions, and deepen their hardship.

Read more:

Money problems are hard enough on their own—but what if the way we feel about our finances is actually making things worse?

02/11/2025

Some time ago I published an article about the Arizona Supreme Court‘s terrible decision that those who live in RVs, motor homes, trailers, or houseboats—basically anything that is not a traditional stick or manufactured home—can lose their home to credit card companies or if they file for bankruptcy protection. Well, now a few good attorneys are doing something about that horrible decision. Plus, two other court decisions that prey on those with lower income. Here is a Channel 12 report. https://www.12news.com/article/news/politics/arizona-family-filed-bankruptcy-wound-up-homeless-arizona-lawmakers-want-make-sure-never-happens-again/75-22dc1c57-fe12-491d-8559-5620b29c4db2

ACBC (www.ACBC.org), a group I started in 2005 to protect consumers and educate bankruptcy attorneys, is sponsoring three bills that will directly help protect those who are forced to file bankruptcy. We are trying to protect those living in RVs, motor homes, trailers, houseboats, etc. Also, those who depend on childcare tax credits to pay for food. Lastly, stop the bankruptcy trustee who sells the debtor’s home in order to personally benefit from the sale if there was any appreciation after filing the bankruptcy.

Read more: https://dianedrain.com/help-arizonans-save-their-homes/

07/03/2024

Hidden Costs of Health Savings Accounts
Created On July 3, 2024

The Consumer Financial Protection Bureau (CFPB) released a report delving into the hidden costs consumers are forced to pay for health savings accounts.
May 1, 2024 The following is a reprint from CFPB’s website (provided for educational purposes only)

Consumer Financial Protection Bureau signThe Consumer Financial Protection Bureau (CFPB) today released a report detailing the complex costs and fees that many consumers with health savings accounts are forced to pay. There were approximately 36 million health savings accounts in 2023 – holding more than $116 billion. These accounts provide tax benefits to help offset the costs of high deductible health plans. However, these benefits are being offset by charges like monthly maintenance fees, paper statement fees, outbound transfer fees, and account closure fees. Today’s report is part of the CFPB’s continuing efforts to reduce the risks and costs brought by financial institutions as they increase their presence in the American healthcare system.

“Health savings accounts are promoted for the tax benefits that chip away at the price tag of health care,” said CFPB Director Rohit Chopra. “Many consumers do not realize the fees, switching costs, and low interest yields that will come with the accounts.”

A health savings account is a tax-advantaged account that generally comes with a high deductible health plan. Typically, a health savings account is in the form of a deposit account selected by an employer or a health insurance company. An employee makes tax-deductible contributions that can then be used for certain health care expenses. Unspent contributions can earn interest, and roll over each year. The individual and family contribution limits for 2024 are $4,150 and $8,300, respectively.

Health savings accounts today hold more than $116 billion, a 500 percent increase since 2013. Additionally, the number of accounts rose more than three times from 2013 to 2023, 11.8 million to 35 million, respectively. The significant growth in the accounts has coincided with the rising use of high deductible health plans.

Consumers have reported a range of concerns with health savings accounts. For some consumers, these accounts come with high costs. Employers often decide on the financial service provider that will manage employees’ health savings accounts. The factors that motivate employers can differ from those of employees. Providers design health savings accounts to compete for employers. The result is that health savings accounts can often present challenges and costs for consumers, such as surprise fees, lack of fund portability, and low-yield interest rates.

When a consumer ends up with a health savings account with high fees and inferior terms, it directly reduces the funds they can allocate to their health care needs. High deductible health plans have higher deductibles than other health plans, so many individuals with these plans, such as people with chronic illnesses, experience higher upfront out-of-pocket health care costs.

High costs and fees can quickly erode a consumer’s ability to pay medical bills. In the case of health savings accounts such fees and costs can also erode tax savings. Specifically, the CFPB’s report found:

Costly, complex, and captive junk fee structures: Many providers that offer health savings accounts charge various fees, including monthly maintenance fees and paper statement fees. Expensive exit fees, like outbound transfer fees and account closure fees, can hold consumers, who may not have selected their accounts, captive to their current providers. The fees are costly and typically unavoidable.
Low interest yields: Despite the recent increase in interest rates across the United States most providers offer consistently low interest rates. Typically, these rates are less than 1%, and, sometimes, even 0%. As a result, consumers could incur significantly more in fees than they earn in interest.
The CFPB has been working to reduce the financial consequences of medical debts as well as to ensure consumers are treated fairly by providers participating in the health care sphere. In September 2023, the CFPB initiated a rulemaking to remove medical bills from many credit reports. In July 2023, the CFPB, along with other federal agencies, launched an inquiry into costly credit cards and loans pushed on patients to pay for health care costs.

Read the CFPB’s report, Health Savings Account Issue Spotlight.

Read Statement of CFPB Director Rohit Chopra on Medical Financial Products.

Read consumer complaints about health savings accounts.

Consumers can submit complaints about financial products or services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).