Protect Yourself from Debt Scams

Protect Yourself from Debt Scams
  • Understand what kinds of scams exist within different debt relief approaches.
  • Avoid any debt settlement firm that charges you up-front fees.
  • Never sign up with a debt elimination firm.

Are you at risk of being ripped off by a debt scams?

Many Americans are overwhelmed by debt and make the decision to seek out debt relief help from a debt solutions provider. If you have debt problems, it makes sense to speak with professional debt management firms, to see what kind of help they can offer you. The debt relief industry is like all other industries; there are some good players and some not-so-good players. While many debt relief services are there to help you, some firms are scams that want to take advantage of your vulnerable situation.

Understanding how to differentiate between a trustworthy debt relief service and one that wants to scam you will save you money and heartache. If you properly educate yourself, you can find the right debt relief option and avoid scams.

Credit Counseling

It is important to know that there are legitimate credit counselors that can truly help you reduce your debt. It is equally important to understand that not all credit counselors have your best interests at heart. Knowing the signs of a scam will protect you from making your debt problems worse.

Credit counselors take a look at your financial situation and help you find ways to manage it. This may include creating a reasonable budget, prioritizing your bills, working with your creditors to reduce your interest rates, and helping you develop money management skills.

Three Warning Signs of a Bad Credit Counseling Firm

To best protect yourself, here are some things to keep in mind when speaking to a credit counseling service:

Beware of high fees

Any credit counselor that asks you for high fees for signing up with them, typically anything that exceeds $50, is probably more interested in your money than actually helping you. Monthly fees that are over $30 should also send up a red flag.

Protect your private information

A credit counselor should not ask you for vital financial information, such as your account numbers and social security number, before explaining what the debt relief the company can provide. A counselor should be first explain to you how the program works, before asking for your important information.

Look for accreditation

A credit counselor should be a member of a leading industry group, such as the NFCC, AICCCA or AADMO. It is a warning sign if the firm with whom you are speaking is not a member of any such organization. Look for a credit counseling firm that has an established track record and history.

Debt Settlement Firms

Debt Settlement or Debt Negotiation firms negotiate directly with your creditors, working to obtain reduced pay-offs on your credit card balances. There are no pre-arranged settlement terms with your creditors. In a settlement program, you do not make monthly payments to your creditors. Each debt is negotiated individually, which involves multiple phone calls, faxes, paperwork and negotiation over months, or even years, depending on the creditor and your particular situation.

The debt settlement industry is now required to follow a set of rules issued by the Federal Trade Commission that went into effect in October, 2010. These rules were created to protect the you, the consumer. For instance, anyone now enrolling in a debt settlement program is not required to pay a service fee to the settlement firm until his or her account has been settled. This makes settlement an even more attractive option for the consumer.

Four Warning Signs of a Bad Debt Settlement Firm

To protect yourself, when speaking to a debt settlement firm, beware of the following:

Up-front fees

Given the new FTC rules, you should not pay any up-front fees to a debt settlement firm that sell their services over the phone. If you are asked to pay any fees before an account of yours has been settled, then you know that you are dealing with a firm that is not compliant with federal regulations.

Unrealistic expectations

Be wary of any settlement firm that tells you that all creditors will be settled with for the same percentage amount. There is no cookie-cutter program. A creditable debt settlement firm will explain that their history shows that some creditors settle for higher percentage of your debt than others and will take this into account when estimating your total costs for the settlement program. Be wary of a settlement firm that tells you that your debt can be settled for the lowest dollar amount than its competitors.

Underestimating impact on your credit

Getting out of debt may be more important to you than how your credit is affected, but no debt settlement firm should tell you that their program will not seriously harm your credit rating.

Insisting on meeting face-to-face

Meeting with a debt settlement representative face-to-face does not guarantee that you will not be scammed. In fact, as the new FTC rules about up-front fees apply to telemarketers, some unscrupulous firms will push for a face-to-face meeting.

Look for a debt settlement firm that is a member of The Association of Settlement Companies (TASC) and whose debt counselors are certified by the International Association of Professional Debt Arbitrators (IAPDA). The IAPDA requires testing to obtain certification and periodic testing, thereafter, to maintain it. Also look for a company that has been in business for a long time.

Debt Consolidation Loans

A debt consolidation loan can be a real solution, by reducing your monthly payments and getting you out of debt more rapidly. With a consolidation loan, you combine all of your high interest bills into one loan at a lower interest rate.

Potential problems with debt consolidation loans include:


Some lenders charge you high fees to sign up for the loan. Sometimes the fees are hidden. Make sure that you understand all fees and that the actual loan total is clear.

Risking your equity

Some consolidation loans use equity in your home or car as collateral, when you are not aware of it. Make sure you understand the true terms of any debt consolidation loan before you sign the papers.

Debt Elimination

This is a total scam. The same people who tell you that you do not have to pay the IRS have surfaced telling you that your credit card debt does not need to be paid back — that it all can be eliminated. Debt elimination firms tell you that your debts are not collectible because only the government is allowed to create money. They claim that credit card companies created money when they granted you a credit line. They want you to believe that when you used your credit card to make a purchase, that you did not incur a debt. They say that the debt is between the Credit Card Company and merchant, but you have no financial responsibility. RUN AWAY FROM DEBT ELIMINATION!

Debt can be both overwhelming and scary, but do not let other people prey on your fears. When you understand what your true options are and whom you can trust, you are one step closer to reducing your debt.