Debt Settlement in Tennessee: Fees, Credit Impact, and Scams

Debt settlement in Tennessee is the practice of negotiating with creditors to accept less than the full balance owed on unsecured debts like credit cards and medical bills, and since January 1, 2026, any company offering that service to Tennessee residents must be licensed by the state and is barred from charging you a penny until it has actually settled at least one of your debts. That rule, part of the Debt Resolution Services Act, lines up with a federal rule that has been in force since 2010. The protections are real, but settlement still carries serious costs: damaged credit, possible lawsuits during the saving period, and a tax bill on the forgiven amount. Knowing what the law requires of settlement companies, what creditors can still do to you, and how settlement compares to bankruptcy will tell you whether it’s the right path.

What a Licensed Settlement Company Can and Cannot Charge You

Tennessee’s Debt Resolution Services Act, enacted as Public Chapter 287 in April 2025, took effect on January 1, 2026 and is administered by the Tennessee Department of Commerce and Insurance.¹ The piece of it that matters most to a consumer is the fee rule.

Before a settlement company can collect any fee, three things must happen: you’ve signed an agreement, the company has renegotiated or settled at least one of your debts, and you’ve made at least one payment to the creditor under that new arrangement. The fee itself must be calculated either as a percentage of your total enrolled debt or as a percentage of the savings achieved, and that percentage can’t shift from one debt to the next.²

If a company asks you to put money into a dedicated savings account while it negotiates, that account must be at an FDIC-insured bank, titled in your name, and managed by a third party unaffiliated with the settlement company. You can withdraw your money and cancel the agreement at any time without penalty, and the provider has five business days to notify the account administrator of a cancellation.²

Your written agreement must spell out what the company will do, how fees are calculated, realistic timelines, the likely impact on your credit and collection activity, and the possible tax consequences of forgiven debt. You’re also entitled to a statement of accounting at least monthly.²

Several practices are flatly prohibited. A licensed Tennessee provider cannot misrepresent how much you’ll save or how long the process will take, send cease-and-desist letters to your creditors, take a power of attorney over your finances, claim that enrollment will prevent lawsuits or garnishment, or manipulate online reviews. Each violation carries a penalty of up to $5,000, capped at $100,000 total.¹

A few providers are exempt from the licensing requirement entirely: Tennessee-licensed attorneys acting within an attorney-client relationship, banks and their employees, certified public accountants, certain nonprofits, government officers, and the third-party companies that only administer dedicated accounts.¹ If someone pitches you a program under one of those labels, the Tennessee rules may not apply, though the federal rule discussed below often still does.

What Settlement Does to Your Credit, Your Payments, and Your Taxes

Debt settlement typically takes two to three years. Most programs direct you to stop making payments to your creditors and instead deposit money into a dedicated account until there is enough to make a lump-sum offer. Creditors are not required to accept any offer.³

While you’re saving, the unpaid accounts keep accruing late fees and interest, and collection activity ramps up. Credit scores can drop more than 100 points, and the negative marks remain on your credit report for seven years.³

Forgiven debt is also a tax event. If a creditor cancels $600 or more, it files a Form 1099-C with the IRS, and you have to report the forgiven amount as income on your federal return. Tennessee has no state income tax on wages, but the federal obligation applies.⁴

There is a significant exclusion for people in financial distress. If your total liabilities exceeded your total assets immediately before the cancellation, you can exclude the forgiven amount from income to the extent of that insolvency by filing IRS Form 982 with the insolvency worksheet. Debt discharged in a Title 11 bankruptcy case is excluded from income entirely.⁵

What a Creditor Can Still Do While You’re In a Program

Enrolling in a settlement program does not stop a creditor from suing you. Tennessee licensed companies are specifically barred from claiming otherwise.¹ The practical risks come down to the statute of limitations, garnishment, and what property is protected if a judgment is entered.

Statute of Limitations

In Tennessee, the deadline for a creditor to sue is six years from the date of your last payment on most credit card accounts, written and oral contracts, and open accounts, under Tenn. Code Ann. § 28-3-109. Contracts for the sale of goods have a four-year deadline under Tenn. Code Ann. § 47-2-725, and judgments remain enforceable for ten years from entry under Tenn. Code Ann. § 28-3-110.⁶⁷

Making any payment on the debt or acknowledging it in writing can restart the clock. This matters directly for settlement: if you make a small good-faith payment to a creditor outside the formal settlement, you may hand the creditor a fresh window to sue.

Wage Garnishment

If a creditor sues and wins, Tenn. Code Ann. § 26-2-106 limits weekly wage garnishment to the lesser of 25% of your disposable earnings or the amount by which your disposable earnings exceed 30 times the federal minimum wage. You get an additional $2.50 reduction per dependent child under 16 living in Tennessee.⁸ A garnishment stays active until the judgment is paid or six months after service, whichever comes first. Social Security, SSI, unemployment, veterans’ benefits, and government pensions cannot be garnished.⁹

Even after a garnishment starts, you can file a Motion to Pay by Installments under Tenn. Code Ann. § 26-2-216. Filing the motion pauses the garnishment until the court holds a hearing, and if the judge approves an installment plan and you keep up with it, the garnishment stays suspended.¹⁰

Property That’s Protected

Tennessee’s homestead exemption under Tenn. Code Ann. § 26-2-301 protects up to $35,000 of equity in your primary residence as an individual, or $52,500 for joint owners. It doesn’t cover the purchase-money mortgage itself or debts where the exemption was waived in writing.¹¹

For personal property, you can protect up to $10,000 of assets of your choosing, spread across cash, vehicles, furniture, electronics, jewelry, and similar belongings. Clothing, family pictures, the family Bible, schoolbooks, Social Security and VA benefits, and welfare payments are exempt without needing to be listed. To preserve the $10,000 flexible exemption, file a list with the court clerk within ten days of a judgment.¹⁰

How Collectors Must Behave

Debt collectors operating in Tennessee are licensed through the Tennessee Collection Service Board. They cannot threaten violence, use obscene language, misrepresent what you owe or its legal status, pretend to be attorneys, or call outside 8 a.m. to 9 p.m. local time.¹²

Within five days of first contacting you, a collector must send a written notice stating the amount owed, the creditor’s name, and your right to dispute the debt within 30 days. If you dispute it in writing, collection must stop until the collector sends you verification. A violation of the federal Regulation F counts automatically as an unfair or deceptive act under Tennessee’s collection rules.¹²

Settlement or Bankruptcy?

Chapter 7 bankruptcy can discharge most unsecured debts in a matter of months, but it requires passing a means test showing income below Tennessee’s median. Chapter 13 is open to higher-income filers and lets you keep your assets while following a court-supervised repayment plan of three to five years. A bankruptcy filing stays on your credit report for seven to ten years and can drop a score 100 to 200 points.³

Settlement is slower, carries no guarantee of success, and typically depresses credit roughly as hard during the saving period. Its advantage is that it avoids a bankruptcy filing on your record and may leave more flexibility for people with income too high for Chapter 7 and assets they’d rather not route through a Chapter 13 plan. Its disadvantages are the lawsuit risk during the two to three years of nonpayment and the tax bill on forgiven amounts, which bankruptcy avoids entirely.⁵

How to Tell a Legitimate Provider From a Scam

The federal Telemarketing Sales Rule has prohibited advance fees for debt relief services since 2010. It applies to any for-profit company that uses phone calls or responds to advertising inquiries, in or out of state. Under the TSR, no fee can be collected until at least one debt has been settled and you’ve made at least one payment under the resulting agreement. Companies must disclose total costs, the time the process will take, the amount you need to save before an offer is made, and the effect on your credit and collection activity.¹³

The TSR exempts bona fide nonprofits and companies that conduct an in-person sales presentation. Some operations have tried to game the exemptions by routing consumers through notary signings or labeling fees as attorney “retainers.” The FTC has said hiring attorneys or investment advisors does not create an exemption, and online meetings do not count as face-to-face encounters.¹⁴

Recent enforcement shows the pattern. In January 2024, the CFPB and seven state attorneys general sued Strategic Financial Solutions, alleging it collected more than $100 million in illegal upfront fees by routing consumers through “facade” law firms to claim the attorney exemption. A receiver was appointed, and the case remained in active litigation into early 2026. Tennessee was not among the states that joined that suit.¹⁵¹⁶ In July 2025, the FTC obtained a temporary restraining order and asset freeze against Accelerated Debt Settlement and six related companies over what it called a $104 million scheme that impersonated banks, credit card companies, and government agencies and specifically targeted older consumers and veterans.¹⁷

Before signing anything, verify that the company holds a Tennessee debt resolution services license through the Department of Commerce and Insurance, read the written agreement for the specific disclosures the DRSA requires, and walk away if you are asked to pay anything before a debt has actually been settled and you have made a payment under the new terms. If a company’s pitch depends on an exemption that lets it skip these rules, that is itself a reason to be careful.

1
Tennessee Department of Commerce & Insurance. New Licensing Requirements, Consumer Protections for TN Consumers Through Debt Resolution Services Act
2
Tennessee Secretary of State. Public Chapter 287, Debt Resolution Services Act
3
Debt.org. Consumer Debt in Tennessee
4
Internal Revenue Service. Tax Topic 431, Canceled Debt: Is It Taxable or Not?
5
Internal Revenue Service. Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments
6
FindLaw. Tennessee Civil Statute of Limitations Laws
7
National List. Tennessee White Paper
8
Tennessee Attorney General. Opinion 19-10, Wage Garnishment
9
Tennessee Courts. The Lifecycle of Debt Collections
10
Legal Aid of East Tennessee. Stopping a Garnishment
11
Justia. Tennessee Code § 26-2-301, Homestead Exemption
12
Tennessee Secretary of State. Rules of the Tennessee Collection Service Board, Chapter 0320-05
13
Federal Trade Commission. Debt Relief Services and the Telemarketing Sales Rule: A Guide for Business
14
Federal Trade Commission. Debt Relief Services and the Telemarketing Sales Rule: What People Are Asking
15
Regulatory Resolutions. Consumer Financial Protection Bureau et al. v. StratFS LLC et al.
16
Consumer Financial Protection Bureau. CFPB and Seven State Attorneys General Sue Debt Relief Enterprise Strategic Financial Solutions
17
Federal Trade Commission. FTC Halts Illegal Debt Relief Operation That Falsely Impersonated Businesses and Government