How to avoid debt relief scams
Keeping an eye out for common red flags can prevent you from losing money to crooks
Offers of debt relief can seem like a light at the end of the tunnel if you’re facing unbearable debt. And while there are legitimate ways to consolidate, negotiate or even eliminate your debt, not all of those debt settlement and relief companies are out to help you.
Unfortunately, debt relief scams are rampant. Scammers exploit debtors’ vulnerability by offering false promises of quick and easy solutions, such as debt consolidation loans with unrealistically low interest rates or debt settlement programs with “guaranteed” results.
- Red flags of debt relief scams include unsolicited offers, upfront fees and promises of guaranteed results.
- Always check for reviews and verify the legitimacy of debt relief companies before engaging their services.
- Report all scams to the Federal Trade Commission or the Consumer Financial Protection Bureau.
Signs of a debt relief scam
Debt relief scams are unfortunately quite common. These scams often result in further financial distress and, at times, legal consequences for the victims. But recognizing these signs of scams can help prevent serious financial damage:
They contact you
You’re required to pay upfront fees
“If, at any time before that, the consumer withdraws from the program or a reasonable settlement is not reached, the agency returns ALL of the money sent to the consumer.”
The Federal Trade Commission (FTC) also explicitly states that a settlement company cannot charge you upfront. Scammers try to lure you in with the promise of quick relief, claiming that for an upfront fee, they’ll make all your debt go away. The adage “If it’s too good to be true, it probably is” applies here. There isn’t a quick and easy fix to debt, or else everyone would do it.
The company guarantees results
There’s a lack of transparency
Scammers may avoid providing you with written documentation, making it difficult for you to understand the terms of the agreement fully. Reputable debt relief firms should be open about their fees, processes and potential risks.
You’re pressured to make a quick decision
When dealing with any debt settlement company, take your time to make informed decisions. If you ever feel uncomfortable, it’s likely a sign the company isn’t legit or at least doesn’t work well for your needs.
There’s a lack of credible reviews
Before working with a company, always do a Google search or look at trusted review sites like ConsumerAffairs to find feedback from past clients. If you can't find any information or the reviews seem suspicious, consider alternative providers.
Who do you report scams to?
Scams and fraud get reported to the FTC, and you can report the scam online through the FTC website. You can report a scam, a specific company or a phone number that you received a spam phone call from.
When you report the scam or fraud, you’ll go through a quick online process in which you’ll report if the experience was with a person, a job listing, a phone call, credit- or loan-based, etc. If you select scams about debt or loans, you’ll be redirected to the Consumer Financial Protection Bureau (CFPB), where you’ll take about 10 minutes to submit a complaint online.
How to get debt relief (the legitimate way)
Dealing with debt is often challenging and downright stressful, but there are legitimate strategies to get out of debt and regain financial stability.
Consider the following options instead of sketchy debt relief offers:
- Debt consolidation: Debt consolidation loans bunch all of your debts into a single lower-interest loan. This simplifies payments and reduces the total cost you’ll pay over the life of the loan.
- Balance transfer credit card: If your debt is mostly high-interest credit card debt, transferring these balances to a card with a 0% introductory rate saves you on interest. Just be sure you can pay it off before the regular interest rate kicks in.
- Home equity loan or line of credit: If you're a homeowner, you can tap into your home's equity to pay off high-interest debts, either in the form of a lump sum loan or a credit line with a lower interest rate. Be cautious, though, as this uses your home as collateral, meaning it may be taken away if you can’t keep up with payments.
- Credit counseling: There are reputable nonprofit credit counseling organizations. The free option doesn’t include debt settlement, but they can provide budgeting assistance and financial planning help.
- Debt management plan: The paid service credit counselors offer is a debt management plan that helps you repay your debts with a structured payment schedule.
- Debt settlement: Debt settlement itself is a legitimate practice, although it can be a costly one that impacts your credit score and so should be a last resort. Debt settlement companies negotiate your debts on your behalf with creditors, but they charge fees and will instruct you to stop making payments on your debts to push the creditors into agreement. It doesn’t always work, so tread carefully, even if it is a legit company.
» MORE: Debt settlement pros and cons
Are debt scams common?
Debt scams are extremely common, with many people preying on vulnerable debtors. The FTC has news releases about various scams, and the list is a long one.
How do I stop scam calls?
Your first step to stop scam calls is to register on the National Do Not Call Registry. This helps you avoid telemarketer calls. You can also download a call-blocking app that filters out spam.
Why do people fall for scams?
Believe it or not, everyone can fall for a scam. People fall for scams due to emotional manipulation, the convincing appearance of legitimacy and lack of awareness about common scams. We’re particularly susceptible in times of financial hardship or personal distress.
What are some scams you should avoid when looking for a credit counselor?
Scam credit counselors have the same red flags as other scams, including charging upfront fees, promising fast and quick guaranteed debt relief, and a lack of transparency. Avoid credit counseling agencies that demand significant upfront payments, as legitimate ones typically offer free initial consultations.
- Consumer Financial Protection Bureau, “ CFPB Takes Action Against Debt-Settlement Company for Charging Consumers Unlawful Fees .” Accessed Sept. 21, 2023.
- Federal Trade Commission, “ Report to help fight fraud! ” Accessed Sept. 21, 2023.
- Consumer Financial Protection Bureau, “ Submit a complaint about a financial product or service .” Accessed Sept. 21, 2023.
- Federal Trade Commission, “ Debt Relief and Credit Repair Scams .” Accessed Sept. 21, 2023.
- Federal Trade Commission, “ National Do Not Call Registry .” Accessed Sept. 21, 2023.
- Better Business Bureau, “ Scam Tracker .” Accessed Sept. 21, 2023.
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