Beware: Debt Settlement Companies

If you're deep in debt and need some expert advice, be wary of any company that promises to get rid of your debt. They're debt settlement companies, and they can actually make your situation worse.  

Perhaps you've seen their commercials on TV, with misleading marketing ploys like "New Government Programs!" or "Get out of debt in 24 hours!" You know the saying: If it sounds too good to be true, it probably is.

Here's the gist: Debt settlement companies claim to help you pay off your bills for a fraction of what you owe. On top of charging exorbitant fees, they generally advise you to make monthly payments into a special account instead of paying creditors. They promise to use the cash to settle debts for pennies on the dollar, but in the end they usually just pocket your money. Their tactics could result in you losing your cash—or worse, facing a damaged credit score, deeper debt, lawsuits, and more.

Fortunately, consumers are exposing their shady practices: According to the Better Business Bureau (BBB), the number of complaints against debt settlement companies shot up 27%, from 1,378 in 2007 to 1,748 in 2009.

The government's stepping in, too. The Federal Trade Commission announced new rules that go into effect starting today, which take aim at these companies' false promises and up-front fees. The new rules are a good step in the direction of transparency, but they have major shortcomings (for example, they only apply to debt settlement solicitations made over the phone). 

If you need help, here are 5 steps to avoid a scam:

1. Contact trustworthy organizations. Two that I recommend are the Association of Independent Consumer Credit Counseling Agencies and the National Foundation for Credit Counseling (NFCC). Either one can connect you to a reliable debt counselor.


2. Choose a good debt counselor. The NFCC has a handy set of guidelines for selecting the right counselor. Remember that a good one will help you create a budget for free (before signing you up for additional paid services, such as a debt management program—see tip #3) and admit when bankruptcy is a good option (rather than keeping you dangling while they collect fees).


3. Don't confuse debt settlement with debt management. Your counselor may suggest a debt management program, whereby he/she strikes deals with your creditors to lower your monthly payments (and sometimes eliminate fees you've racked up), so that you can ultimately pay back 100% of your debt. This service won't hurt your credit score or put you at risk in other ways. However, you'll pay a monthly fee for the service (they vary by state, but generally won't be more than $50). And even though it's less risky than debt settlement, there are some scams associated with debt management, too, so proceed with caution.


4. Avoid a counselor who tries to put you into a debt settlement or debt management program right away, since debt settlement is usually a scam and debt management can be expensive. You first want to be sure you’ve exhausted your other options, like making changes to your budget.


5. Don't sign anything until you get a second opinion! Call up another credit counselor in your state and ask their advice before moving forward with anyone. You can also check with the BBB to see if there are any complaints filed against the company you're considering.

What's your breaking point: How much debt would you have to incur before reaching out for help?



Comments

[Marc Lapierre]

Hi Beth,
As a retired lender, I can vouch from experience and from having been on the other side of the negotiating table, that debt settlement is not a miracle solution, nor is it appropriate for everyone. This is an extremely important decision that can have long lasting consequences, so someone considering debt relief should very definitely consider the pros and cons of all available alternatives and get expert advice in order to do so. Aside from the impact of choices on credit standing and the legal aspects, reductions negotiated via a debt settlement program can, in some circumstances, actually be considered as taxable income.

A final note as concerns the new rules. Debt relief companies that use telemarketing to solicit clients (outbound calls) have always been subject to the Telemarketing Sales Rule (TSR), but the rule has now been expanded to cover those situations where the clients comtact the company (inbound calls). That said, the FTC's "Debt Relief Services & The Telemarketing Sales Rule: A Guide For Business" defines telemarketing as "involving more than one interstate telephone call.

This suggests that a debt relief company that telemarkets but only within the state where it is incorporated would not be subject to FTC oversight.

Individuals considering dealing with either in or out of state companies should go to their local Attorney General's web site to check if there have been complaints against the company and also, whether debt settlement companies need to be licensed in the state in order to operate there, since more and more states are moving in this direction.

[Credit Counselors]

Debt settlement and debt management that you would get through a credit counselor are two completely different things! I hope that everybody knows the difference between a credit counselor service that offers "debt management" and a debt settelement agency that offers a debt settlement.

Usually a debt settlement is associated with absorbent fees and are associated with scams, where is a credit counselors are normally non-profits, and are free to enter a program.