Debt Settlement Laws by State: Licensing, Fee Caps, and Bans

Debt settlement laws vary sharply from state to state. Some states ban for-profit debt settlement outright, some license it and cap fees in detail, and others police it only through general consumer-protection statutes. On top of that, every state operates under a federal rule that forbids debt settlement companies from charging fees before they actually settle a debt. Where you live determines what a company can legally charge you, what it must disclose before you sign, and what you can do if the arrangement goes wrong.

The Federal Rule That Applies Everywhere

Before looking at any state’s approach, know the federal floor. The FTC’s Telemarketing Sales Rule, amended in 2010 to target the debt relief industry, makes it illegal for a debt settlement company to collect any fee until three things have happened: the company has renegotiated or settled at least one of your debts, there is a written settlement agreement between you and the creditor, and you have made at least one payment under that agreement.¹ If a company enrolls you with several debts, fees must be calculated proportionally against each debt as it settles, or as a percentage of savings on that specific debt. No front-loading.²

The rule also protects the money you set aside to fund settlements. A dedicated account must sit at an insured financial institution, you must own and control it, you have the right to withdraw without penalty at any time, and the account administrator can’t be affiliated with the settlement company.¹

Two limits on the federal rule matter. It applies to for-profit companies that use telemarketing to enroll consumers; it does not cover bona fide nonprofits or companies that meet with you face-to-face before enrollment. Violations carry civil penalties of $53,088 each, and state attorneys general can bring their own enforcement actions under the Telemarketing and Consumer Fraud and Abuse Prevention Act.³

States That Ban For-Profit Debt Settlement

In a handful of states, for-profit debt settlement is not just regulated. It’s illegal.

Louisiana. Louisiana Revised Statutes Title 14, Section 331 makes it a crime to engage in the business of “debt adjusting,” defined to include contracting with a debtor for a fee to adjust, compromise, or discharge debts, or to receive and distribute money to creditors. It’s a misdemeanor punishable by a fine of up to $500, jail up to six months, or both. Attorneys, banks, nonprofits, certified public accountants, and certain others acting in the regular course of their professions are exempt.⁴

Arkansas and Wyoming. Both prohibit most types of for-profit debt settlement, according to a 2010 GAO report. Individuals who violate Arkansas’s ban face up to one year in prison; Wyoming’s is up to six months.⁵

Hawaii and North Carolina. Both prohibit debt adjustment activities, which sweep in both debt management and debt settlement. In North Carolina, House Bill 76 in 2021 proposed recodifying the ban and treating violations as unfair trade practices, while continuing to allow licensed attorneys and capped-fee credit counseling organizations.⁶

States That License Providers and Cap Fees

Most states that permit for-profit debt settlement require a license and impose specific fee limits. The requirements share common bones (licensure, surety bond, disclosure rules, cancellation rights) but the numbers differ considerably.

California

California’s Fair Debt Settlement Practices Act, effective January 1, 2022, mirrors the federal advance-fee ban and adds detailed consumer protections. Providers cannot collect anything until a debt is settled, you agree to the settlement, and you make at least one payment to the creditor. Fees must be calculated proportionally or as a percentage of savings. Written disclosures are required at least three calendar days before the contract is signed, warning that debt reduction isn’t guaranteed, creditors may still sue or garnish wages, credit scores may suffer, and bankruptcy is an alternative. If the sales conversation happened in Spanish, Chinese, Tagalog, Vietnamese, or Korean, the contract must come in that language too. You can cancel at any time without penalty.⁷

If a company breaks the law, you can sue. Statutory damages run from $1,000 to $5,000, plus actual damages, injunctive relief, and attorney’s fees. The statute of limitations is four years, and companies cannot ask you to waive your rights. Attorneys and law firms are exempt only if they don’t share fees with a debt settlement provider and are retained for purposes beyond consumer debt settlement.⁷

Texas

Texas regulates debt settlement providers through the Office of Consumer Credit Commissioner under Chapter 394 of the Texas Finance Code. Providers must license through the state’s ALECS online system and renew annually between January 1 and January 31. Texas uses fixed dollar caps that adjust each year with the Consumer Price Index rather than percentage-of-savings caps. From July 1, 2025 through June 30, 2026, a debt settlement provider can charge a setup fee of up to $559, a monthly service fee of the lesser of $14 per account or $70, and a dishonored-payment fee of up to $30.⁸

Virginia

Virginia’s framework, codified at Title 6.2, Chapter 20.1 of the Code of Virginia, requires a license, a surety bond, and annual reporting.⁹ Under Virginia Code § 6.2-2040, providers can’t collect compensation until they have settled at least one debt and you have made at least one payment toward that settlement. Agreements must be in writing, include a bold-type explanation of costs, and give you the right to terminate without penalty. Before you sign, the provider must disclose the estimated timeline, the amount you need to accumulate before settlement offers begin, and explicit notice that the program may hurt your credit and lead to creditor lawsuits. Providers cannot require a power of attorney, force you to open a specific account, or take referral fees from creditors.¹⁰

Connecticut

Connecticut caps total debt settlement fees at 10% of the amount by which your debt is actually reduced. On top of that, interim charges are limited to a one-time setup fee of no more than $50 and monthly service fees of up to $8 per creditor in the contract, with a $40 monthly ceiling. Debt negotiators must be licensed by the Connecticut Department of Banking.¹¹¹²

Illinois

Illinois splits debt management from debt settlement into two statutes. The Debt Management Service Act requires a license from the Secretary of Financial and Professional Regulation, a surety bond of at least $25,000, and caps fees at $50 for the initial counseling session and $50 per month for ongoing services. Operating without a license is a Class 4 felony.¹³ Debt settlement itself is governed by the Debt Settlement Consumer Protection Act, which caps settlement fees at 15% of your savings.¹⁴

Maine

Under Maine Title 32, §6174-A, debt settlement providers can charge a one-time setup fee of up to $75 and a settlement fee of no more than 15% of the amount by which your debt is reduced. If a provider distributes monthly payments to creditors rather than negotiating lump-sum settlements, the monthly service fee is capped at $40. Providers cannot double-charge when spouses share joint obligations.¹⁵

Maryland

Maryland’s Debt Settlement Services Act, enacted in 2011, requires firms to register with the Commissioner of Financial Regulation through the National Multistate Licensing System. Providers cannot charge for consultations or credit reports. Fees are collectible only after a written agreement is signed, at least one debt has been settled, and you have made at least one payment. You may withdraw at any time without penalty. Providers that hold customer funds must file a $50,000 surety bond.¹⁶ Fees on each individual debt must be calculated either proportionally to that debt’s share of your total enrolled amount, or as a consistent percentage of savings on each debt.¹⁷ If you withdraw, remaining funds in your dedicated account (minus legitimately earned fees) must be returned within seven days.

Pennsylvania

Pennsylvania’s Debt Settlement Services Act, Act 118 of 2014, requires providers to license through the Nationwide Multistate Licensing System with the Department of Banking and Securities and to maintain a $25,000 surety bond.¹⁸ The fee structure follows the federal model: no fees until at least one debt is settled and you have made at least one payment, with fees calculated proportionally or as a percentage of savings. You can terminate an agreement with three days’ written notice and must receive remaining funds within seven business days. Agreements with unlicensed providers are voidable, violations are treated as violations of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law, and the Department can impose civil penalties of up to $10,000 per violation.¹⁹

Tennessee

Tennessee’s Debt Resolution Services Act took effect January 1, 2026, creating a licensing regime administered by the Department of Commerce and Insurance. Providers must post a surety bond of up to $50,000, submit financial statements and consumer agreement forms, and executive officers must pass criminal background checks. The Act prohibits providers from taking power of attorney over your debts, sending cease-and-desist letters to creditors on your behalf, buying consumer debt, or paying for favorable online reviews. Contracts must disclose the fee calculation method, estimated timeline, and warnings about credit damage and tax consequences. Monthly accounting statements are required while your agreement is active. Penalties reach $5,000 per violation, capped at $100,000.²⁰²¹

Florida

Florida’s Debt Settlement Services Act, in effect since 2009, requires annual licensing with the Office of Financial Regulation and a surety bond of at least $10,000 and up to $50,000. Fees are capped at 20% of your principal debt and cannot be charged until you sign a written agreement. You can cancel within three business days. The OFR can impose civil penalties of up to $1,000 per violation.²²

States That Rely on General Consumer-Protection Law

Not every state has a debt-settlement-specific statute. According to the 2010 GAO report, states such as New York and Oklahoma historically relied on general consumer-protection laws rather than industry-specific rules.⁵ In those states, enforcement typically falls to the state attorney general under unfair and deceptive trade practices statutes.

New York recently expanded that authority. Governor Kathy Hochul signed the Fostering Affordability and Integrity through Reasonable (FAIR) Business Practices Act in December 2025, effective February 17, 2026. The law amends General Business Law § 349 to prohibit “unfair” and “abusive” acts alongside “deceptive” ones, aligning the state’s standard with federal definitions used by the CFPB and FTC. Attorney General Letitia James identified debt collection as a target area for the new authority. The expanded powers belong to the AG’s office; private plaintiffs can still bring only traditional deception claims.²³

Statutes of Limitations by State

State law also sets how long a creditor has to sue you for an unpaid debt, and that window shapes any settlement strategy. When the statute expires, the debt becomes “time-barred”: the creditor loses the right to win a lawsuit on it. Windows range from about three years for credit card debt in states like Mississippi, Maryland, and South Carolina to ten years for written contracts in states like Illinois, Kentucky, and Missouri.²⁴

A few practical points matter before you make decisions based on this:

In most states, the clock starts on the date of your last payment, when the account first goes delinquent.
In many states, making even a small payment on an old debt can reset the clock and give the creditor a fresh window to sue.²⁴
Time-barred does not mean gone. The debt still exists and creditors can still try to collect. If you are sued on a time-barred debt, you must show up in court and raise the defense; otherwise you can lose by default.
Credit reporting is separate from the statute of limitations. Under the Fair Credit Reporting Act, most negative items stay on your credit report for seven years regardless of your state’s limitations period.²⁵

Maryland recently narrowed one loophole. Under HB 431, effective June 1, 2026, consumer contracts cannot set statutes of limitations shorter than what Maryland law requires.²⁶

One Federal Rule That Applies No Matter Where You Live: The Tax Hit

State law governs what a settlement company can do to you, but federal tax law governs what happens after. Debt that is forgiven or settled for less than the full balance generally counts as taxable income under the Internal Revenue Code. Creditors are required to file IRS Form 1099-C when $600 or more of debt is canceled, reporting the forgiven amount to both the IRS and you.²⁷ A debt settled by agreement is categorized under Code F on Form 1099-C.²⁸

The main escape hatch is the insolvency exception under IRC Section 108. You are considered insolvent when your total liabilities exceed your total assets. To the extent you were insolvent immediately before the cancellation, the forgiven amount can be excluded from income.²⁹ Claiming it requires filing Form 982 and reducing certain tax attributes (such as net operating losses or the basis of property) by the excluded amount.²⁸ Many people who qualify for debt settlement are in fact insolvent at the time, but standard tax software often does not walk users through these calculations, so the exclusion goes unclaimed.²⁷

1
FTC. Debt Relief Services and the Telemarketing Sales Rule: A Guide for Business
2
Federal Register. Telemarketing Sales Rule, 75 FR 48458
3
FTC. Complying with the Telemarketing Sales Rule
4
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5
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6
UNC School of Government. Modernize Debt Settlement Prohibition
7
Nolo. California’s Fair Debt Settlement Practices Act
8
OCCC Texas. Debt Management and Settlement Providers
9
Virginia Code Commission. Title 6.2, Chapter 20.1 – Debt Settlement Services
10
Virginia Code Commission. Virginia Code § 6.2-2040
11
New Haven Register. Debt Negotiators Subject to New Law
12
Loeb & Loeb. Connecticut Department of Banking Issues Fee Schedule
13
Illinois General Assembly. Debt Management Service Act, 205 ILCS 665
14
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15
Maine State Legislature. MRS Title 32, §6174-A
16
People’s Law Library. Maryland Debt Settlement Services Act
17
New York Codes, Rules and Regulations. Maryland Financial Institutions Code § 12-1012
18
Pennsylvania Department of Banking & Securities. Non-Bank Licensees
19
Pennsylvania Legislature. Debt Settlement Services Act, Act 2014-118
20
Tennessee TDCI. New Licensing Requirements and Consumer Protections Through Debt Resolution Services Act
21
Tennessee Secretary of State. Debt Resolution Services Act, HB 743
22
Florida Senate. CS/HB 1045 – Debt Settlement Services Act Analysis
23
New York Attorney General. Attorney General James, CFPB, and Multistate Coalition Protect Consumers from Debt Relief Scheme
24
InCharge Debt Solutions. What Is the Statute of Limitations in All 50 States
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26
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27
Oklahoma Bar Journal. Tax Implications of Canceled Debt
28
IRS. IRS Publication 4681 – Canceled Debts, Foreclosures, Repossessions, and Abandonments
29
IRS. What If I Am Insolvent