Debt Settlement in Arkansas: Fees, Creditor Actions, and Taxes

Debt settlement in Arkansas is a process where you, or a company you hire, negotiate with a creditor to accept a lump-sum payment for less than the full balance on an unsecured debt such as a credit card, medical bill, or personal loan. It can reduce what you owe, but Arkansas law and federal rules both regulate how it’s sold, and the months you spend building up settlement money are months your creditors can sue, garnish wages, and pile on interest and fees.

How the Process Works

In a typical program, you stop paying your creditors and instead deposit money each month into a dedicated savings account. Once the balance is large enough, the settlement company contacts a creditor and offers a lump sum to close out the account. Some companies advertise settlements of 30 to 70 percent of the balance, but the Arkansas Attorney General’s office warns those claims are “only rarely accurate.”¹

The savings account itself is regulated. If a settlement company requires one, the account must sit at a federally insured institution, be owned by you, and be available for withdrawal at any time without penalty. The company is not allowed to own or control it.²

While that account grows, missed payments show up on your credit report, interest and late fees keep accruing on the underlying balances, and creditors keep every legal collection right they had before you enrolled.¹

What a Debt Settlement Company Can Charge and Promise

Under the Federal Trade Commission’s 2010 amendment to the Telemarketing Sales Rule, a for-profit debt relief provider cannot collect any fee until three things have happened: it has actually settled or reduced at least one of your debts, you have agreed to that settlement, and you have made at least one payment under the new terms.²

Before you sign up, the company also has to disclose the total cost of the program, how long it will take, how much you need to save before an offer will be made, and the consequences of stopping payments to your creditors. False or unsubstantiated claims about results are prohibited outright.³

Arkansas layers its own requirements on top through the Credit Repair Services Organizations Act, codified at Title 4, Chapter 91 of the Arkansas Code and updated by Act 944 of 2017. Any organization that accepts payment before fully performing its services has to post a $10,000 surety bond with a surety company authorized to do business in Arkansas and hold client funds in a trust account at a federally insured Arkansas bank or savings institution.⁴ Contracts must be in writing, must spell out every fee, the schedule of payments, and the expected timeline, and must give you five days to cancel.⁵

Violations are treated as deceptive and unconscionable trade practices under the Arkansas Deceptive Trade Practices Act. The Attorney General can seek injunctions and civil penalties of up to $10,000 per violation, and you can bring your own lawsuit for actual damages and recover attorney’s fees.⁶

What Creditors Can Still Do While You’re Enrolled

Nothing in Arkansas law stops a creditor from suing you while you’re saving up settlement funds. If you’re served with a complaint, you have 30 days to file a written response. Miss that window and the creditor can take a default judgment, which unlocks the full set of enforcement tools right away.⁷

The main enforcement tool is wage garnishment. Under federal and Arkansas law, a creditor with a judgment can take the lesser of 25 percent of your disposable earnings or the amount by which your weekly disposable earnings exceed $217.50. If you take home $217.50 or less per week after taxes, your wages are fully exempt. Judgments themselves last ten years in Arkansas and can be renewed for another ten.⁸

Third-party debt collectors are bound by the federal Fair Debt Collection Practices Act and the Arkansas Fair Debt Collection Practices Act at Ark. Code §§ 17-24-501 through 17-24-512.⁹ Collectors can’t contact you before 8 a.m. or after 9 p.m., can’t call you at work if your employer prohibits it, and have to stop contact after you send a written cease-communication request. Harassment, false threats of imprisonment, and pretending to represent a government office are all violations.¹ Arkansas is a one-party consent state for phone recordings, so you can legally record calls with a collector without telling them.⁷

The Statute of Limitations, and Why It Matters Mid-Settlement

The statute of limitations caps how long a creditor has to sue you. In Arkansas, the deadlines run from the date of default:

Written contracts, including credit cards: five years.¹⁰
Oral contracts: three years.¹¹
Medical debts: two years.⁷
Court judgments: ten years, renewable.¹⁰

Making a partial payment or acknowledging the debt in writing resets that clock.¹⁰ That’s a real trap during settlement negotiations, because a written offer or a small good-faith payment on an old account can revive a debt the creditor could no longer sue on. And if a creditor does sue on an expired debt, you have to show up in court and raise the statute of limitations as an affirmative defense. The court will not apply it for you.¹²

Taxes on Forgiven Debt

When a creditor writes off part of what you owe, the IRS generally treats the forgiven amount as taxable income. If $600 or more is canceled, the creditor may issue a Form 1099-C, and you have to report the amount whether or not the form arrives.¹³

There are exceptions. Debt canceled in a Title 11 bankruptcy, debt forgiven while you are insolvent (your total debts exceed your total assets), and certain qualified farm indebtedness can be excluded from income, but claiming the exclusion requires filing IRS Form 982 and reducing tax attributes such as loss carryforwards or asset basis.¹³ Arkansas does not automatically conform its income tax code to every federal change, so state treatment of forgiven debt should be checked with a tax professional.

What It Does to Your Credit

Because most settlement programs tell you to stop paying, missed-payment marks accumulate on your credit report during the months you’re saving up. After a settlement closes, the account is generally reported as “settled for less than the full amount,” which is itself a negative entry. Accurate negative information can stay on your report for seven years, and no company can legally promise to remove it.¹⁴

If you enroll and then drop out, you still owe the full original balance plus the interest and fees that piled up while you weren’t paying, and the credit damage from the missed payments stays.¹⁴

Warning Signs of a Bad Operator

The Arkansas Attorney General’s office flags several tactics that mark a debt relief program as deceptive:

Charging any meaningful fee before settling a debt, which violates the FTC’s Telemarketing Sales Rule.
Guaranteeing results or promising to settle for “pennies on the dollar.”
Demanding “voluntary contributions” or personal financial data before explaining the program.
Claiming there is a government program that pays off personal credit card debt. There isn’t one.
Telling you to cut off all contact with creditors, or promising that lawsuits and collection calls will stop on their own.

Suspected scams can be reported to the Arkansas Attorney General’s office at 800-482-8982, the Federal Trade Commission, or the Arkansas State Board of Collection Agencies.¹

Alternatives Worth Weighing

Settlement is one option, not the only one. Chapter 7 bankruptcy eliminates most unsecured debts without a repayment plan and typically produces a discharge in about three months, though you have to qualify based on income and expenses. Chapter 13 restructures debts into a three-to-five-year court-supervised plan and is open to anyone with regular income. Both chapters require a credit counseling course before filing and a financial education course before the case closes. Unlike settlement, bankruptcy triggers an automatic stay that halts lawsuits, garnishments, and collection calls the day the case is filed.¹⁵

Nonprofit credit counseling is a different route again. Credit Counseling of Arkansas is a 501(c)(3) established in 1995 and accredited by the National Foundation for Credit Counseling, the Council on Accreditation, and the Better Business Bureau.¹⁶ It offers free budget counseling and credit report reviews, and its Debt Management Program consolidates unsecured debts into a single monthly payment while working with creditors to lower interest rates and waive late fees. That’s a repayment approach, not a settlement approach, and the distinction matters: you pay the full principal, but you avoid the missed-payment period that drives most of settlement’s downside.¹⁷

1
Arkansas Attorney General. Debt Relief Services Fair Debt Collection
2
Federal Trade Commission. Debt Relief Companies Prohibited From Collecting Advance Fees Under FTC Rule
3
Federal Trade Commission. Debt Relief Services Telemarketing Sales Rule Guide for Business
4
Justia. Arkansas Code Section 4-91-202
5
Arkansas General Assembly. Act 944 of 2017
6
USLegal. Arkansas Deceptive Trade Practices Laws
7
SoloSuit. Settle Debt in Arkansas
8
Arkansas Legal Aid. Garnishment
9
Justia. Arkansas Code Title 17 Subtitle 2 Chapter 24 Subchapter 5
10
National List. Arkansas Debt Collection White Paper
11
Justia. Arkansas Code Section 4-3-118
12
Ascend. Statute of Limitations Arkansas Debt
13
Internal Revenue Service. Tax Topic 431 Canceled Debt
14
Federal Trade Commission. How To Get Out of Debt
15
Arkansas Legal Aid. Types of Bankruptcy
16
Credit Counseling of Arkansas. CCOA Home
17
Credit Counseling of Arkansas. CCOA Locations