Avoid a Debt Relief Scam

Consumer protection, Money

Between the stock market nosedive, the housing market crisis, bank failures, and record unemployment, millions of Americans are saddled with consumer debt they can’t pay. In our “keeping-up-with-the-Joneses” society, many of us have overspent, depending on home equity or future earnings to pay for what seems like an average lifestyle, only to find ourselves jobless, underwater on our mortgages, or simply unable to keep up with high interest rates.

In response, debt relief programs have proliferated, growing from only 8 in 2002, to over 2,000 by 2010. To protect people from having to file for bankruptcy, debt relief programs work by consolidating debt, lowering interest rates, and/or getting creditors to agree to lower payments. If done right, a good debt relief program can be a lifesaver.

Unfortunately, plenty of con artists have taken advantage of people who are desperate for a solution to their growing stacks of bills. Though new laws have been passed to help protect people from debt relief scams, there are still a few things you need to know to protect yourself from predators. Otherwise you could end up in far worse financial shape than you started.

The Scams

Debt relief scams come in a few different forms. Some will tell you they can get your creditors to lower the overall amount you have to pay, while others claim they can get your creditors to lower their interest rates. They may promise to stop creditor calls, or tell you that if you give them a certain amount of money per month, they will pay off your creditors for you. You can count on getting socked with a fee, which is occasionally exorbitant, but you may see little or no improvement in your debt situation and may be left in worse financial shape than ever.

Surprise Fees

Not only are many of these companies unable or unwilling to fulfill their promises of debt relief and lower interest rates, but the fees often go unmentioned or the company lets you think the initial payment will go toward your debt, when it really doesn’t. Occasionally you will be asked to set up an account out of which they are to pay your creditors, but it’s also used as a source for additional fees. Fake credit repair companies promise to repair bad credit for a fee, but don’t actually do so even after you’ve paid them. These companies prey on your desperation and trust, making reassuring promises while collecting your financial information and convincing you that enrolling in their programs will save you.

Making An Example

Last May, the Federal Trade Commission shut down two such companies, Advanced Management Services NW LLC and Dynamic Financial Group, for placing illegal robo-calls to consumers (including those on the Do Not Call Registry) which claimed to dramatically lower their interest rates. After customers paid their fees—up to $1,995—the companies simply sent instructions on early debt payoff. Though Dynamic Financial Group offered a refund to customers who didn’t save a particular amount, they failed to actually pay the refunds. The company heads were banned from offering debt relief services or making robo-calls in the future. They were also fined millions, but not all were able to pay, leaving some scammed consumers out of luck.

Consumer Protection Laws

In 2010, in response to thousands of consumer complaints, changes were made to the Telemarketing Sales Rule (TSR) to help protect consumers from these types of debt scams. The new rules require debt-relief companies to specifically disclose their policies and processes, including negative consequences and, more importantly, require the companies to actually settle or reduce debt before charging any fees. However, these new rules only apply to calls and advertisements by for-profit companies, and don’t apply to in-person or online claims that may be more ambiguous. It is still the responsibility of the debtor to be aware of claims that sound too good to be true.

Reliable Debt Relief Resources

Fortunately, reliable debt relief and credit counseling services do exist and can help if you are in debt over your head. Here are some things to keep in mind when looking for help:

•    Compare at least 3 companies, with an understanding of the differences between debt consolidation, debt settlement, and credit counseling. Find out as much as you can about the services and fees of each company.

•    Check the Better Business Bureau and ask for references.

•    Know that legitimate companies will spend at least 20 minutes becoming familiar with your finances, and will put together a plan that fits your specific needs. One size does not fit all in debt relief.

•    According to the Consumer Federation of America, you should never have to pay more than $50 up front and $25 for monthly maintenance. If fees are significantly higher than that or vague, it’s a red flag.

•    A good starting point is the National Foundation for Credit Counseling, which can help you find a legitimate financial counselor in your area.