Debt Relief Scams & How To Avoid Them
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When it comes to debt relief, there are two ways you can get scammed or ripped off. First, the scammer will promise to help you with your debt for a significant fee. Then, after you pay the high fees, they run off with your money. Second, the scammer helps reduce some of your debt. However, any debt relief gets outweighed by the fee you had to pay, along with new interest and penalties. To help you identify these dishonest debt-relief providers, keep an eye out for the following signs.
Written by Attorney Curtis Lee.
Updated July 20, 2021
Consumer debt in the United States is almost $15 trillion. Not all of this debt is a problem since many borrowers have no issues repaying what they owe. But many others aren’t so lucky. They struggle every month to pay for their basic living expenses while also trying to pay down their debts.
If a debt problem becomes very bad, it might seem like there’s no way out. Then it becomes easier to be a victim to the false or misleading promises made by debt settlement companies and scam artists. The good news is that there are clear warning signs to help you avoid these situations. This article will discuss some of those warning signs and how to avoid getting scammed.
Debt Relief Scams: Warning Signs To Detect Scammers
When it comes to debt relief, there are two ways you can get scammed or ripped off. First, the scammer will promise to help you with your debt for a significant fee. Then, after you pay the high fees, they run off with your money.
Second, the scammer helps reduce some of your debt. However, any debt relief gets outweighed by the fee you had to pay, along with new interest and penalties. To help you identify these dishonest debt-relief providers, keep an eye out for the following signs.
Scammers Contact You First
Scammers will often make first contact with their victims through robocalls using pre-recorded messages. If someone reaches out to you out of the blue, saying they can help you with your debt, ignore them.
They Ask For Upfront Fees
This is one of the quickest and easiest ways to spot a debt relief scammer. According to the Federal Trade Commission’s (FTC) Telemarketing Sales Rule, it’s illegal for a debt relief services telemarketer to ask for upfront payment. Some states, such as North Carolina, also have laws that prohibit pre-payment for debt relief services.
There’s No Valid Written Contract
An authentic debt relief company will disclose all of its terms and conditions in a written contract. Scammers, on the other hand, will often refuse to explain their fees and the terms of what they’re offering. On the off chance that a scammer does provide information, they often won’t do it in writing. A dishonest debt relief organization might falsely claim that a verbal agreement is enough.
Not having a written contract could also be illegal in some cases. The FTC’s Credit Repair Organization Act requires any credit repair contracts (which could be part of credit relief services) to be in writing. Borrowers seek these services to improve their credit reports.
You should also keep in mind that a written contract doesn’t guarantee that the debt relief service is trustworthy. A scammer may provide a shady written contract in the hope that you won’t read it or ask to change any of its terms.
They Ask You To Stop Communicating With Your Creditor
In trying to fix your debt issues, the last thing you want to do is start ignoring your creditor or lender. It’s good to have an open line of communication. Plus, continuing to make monthly payments is good for your credit and can also help you avoid monthly fees and penalties. It also makes it less likely that you’ll experience other negative consequences, like your creditor trying to sue you.
Debt relief scammers have a different idea in mind. They may claim they can help if you stop communicating with your creditor and stop making payments. These are major red flags. The scammer might say that this will convince your credit card company or other lenders to accept a partial payment of your debt.
Debt Settlement Scams Involve Exaggerated Promises
Scammers often make unrealistic promises to entice you to fall for their con. They know that many borrowers are desperate to get out from under their debt burden, so unrealistic claims can be easy to believe. For example, they might claim that they can make your debts disappear or that they can settle your debts for a few cents on the dollar. One thing to remember is that debt relief companies and scammers can’t force creditors to do anything. As a result, they can’t promise that a creditor will forgive or reduce a debt.
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Complementary Tips To Avoid Debt Relief Scams
If you’re considering a debt relief service, the best way to avoid a scam is to know as much as possible about debt relief. You can do this by doing your own research online. It’s also a good idea to consult with a credit counseling service from a nonprofit debt relief organization like the National Foundation for Credit Counseling.
Know Debt Relief Options & Their Consequences
Debt consolidation, debt settlement, and bankruptcy are three major debt relief options available to borrowers.
Debt consolidation means you take two or more debts and combine them into a single debt. The goal with debt consolidation is to make your monthly payments more manageable or more affordable. This is common with credit card debt. If you can consolidate several high-interest loans into a single loan with a lower interest rate, you can reduce the total amount of money you pay during the life of the loan. But depending on the loan’s terms, it might lead to higher monthly payments.
In some cases, debt consolidation could result in lower monthly payments. But the term of the loan may be extended. So while your current payments are more affordable, you’ll end up paying more money in the long run.
Keep in mind that there may be origination or transaction fees to consolidate your debt. These fees could make debt consolidation more expensive than keeping your multiple debts the way they are.
With debt settlement, you can pay off one or more debts for less than what you owe. But the creditor may expect you to pay off the entire debt in one lump sum. You might also receive an unexpected tax bill. That’s because the debt that’s forgiven as part of a debt settlement agreement may be considered taxable income by the IRS. If you use a debt relief company to negotiate a debt settlement on your behalf, you may see an increase in debt collection activities. Especially if the debt relief service tells you to stop making payments to your creditors.
A final option for debt relief is filing bankruptcy. Given the consequences that this can have on your credit score, you’ll want to use bankruptcy only after other debt-relief options have failed. But if done properly, bankruptcy has several advantages, including:
An automatic stay, which can stop most debt collection actions against you, at least for a while
The discharge of one or more unsecured debts
Exemptions, which will protect certain types of property from collection by creditors
A fresh start for your finances
Don’t be surprised if the moment you bring up these debt relief options to the scammer, they cut off all contact. Scammers know their racket is a numbers game. They try to contact as many people as possible in hopes that even a few will fall for the scam. The more people they call, the better their odds at succeeding in their debt fraud scheme.
Contacting your creditors directly is a great way to learn about legitimate debt relief options. Lenders can tell you what options you have if they know you’re having trouble repaying your debts.
Check Debt Settlement Company’s Credentials
You’ve been in contact with a debt settlement company and there don’t appear to be any red flags. You’re ready to hire them, right? Not yet.
Checking out the company’s website is a good start, but having a nice-looking website isn’t necessarily a sign of a reputable company. Before hiring a debt relief company or signing a contract, there are several things you can do to check them out.
Contact your state’s attorney general (AG). Your state’s AG sometimes gets involved in consumer protection lawsuits. So, they can help you see if a company has received complaints from other borrowers.
Contact the Federal Trade Commission (FTC). Like your state’s AG, the FTC may have information that can assist you in learning more about a potential debt relief company and any legal trouble they could be in.
Talk to your creditor. Some creditors will have a list of debt relief companies they won’t work with due to dodgy business practices.
Do an online search using the company’s name. Type in the company’s name in an online search engine and see what kind of publicity the company is getting.
Check to see if they have a legitimate physical address. Use an online map search tool or a map app to look up the debt relief company’s physical location. If your search comes up as an empty lot in the middle of nowhere, that’s a strong sign the company is not legitimate.
Search the Better Business Bureau (BBB). If a company’s trying to scam you, they probably aren’t accredited with the BBB.
If you conclude that a so-called debt relief company is a scam, don’t hesitate to report it to the FTC or your state’s attorney general’s office.
Debt relief scams aren’t always easy to spot. However, they have several traits that usually indicate they’re a scam:
The scammer contacts you first.
They charge an upfront fee.
They won’t provide a written contract.
They ask you to stop communicating with your creditors.
They make exaggerated promises.
To avoid falling for a scam, check out each debt relief company by looking into their background to see if they’re legitimate. You can also take time to learn about legitimate debt relief programs and options by doing research online or getting in touch with your creditors or a credit counselor from a nonprofit organization.