Debt Consolidation Scams

As more and more people struggle to keep up with mortgage, loan, and credit card payments, the appeal of the numerous TV, radio, and print advertisements promising to reduce or eliminate your debt is growing fast.

Beware of offers to eliminate or drastically reduce your debt. There are reputable companies who can help you, but there are also many misleading statements and outright scams. Preying on those in desperate need of financial help ranks as one of the more despicable tactics in the marketplace. Sadly, it is also one of the fastest growing.

Beware of Scams

Always apply some common sense when it comes to knowing a scam from a legitimate offer: If it sounds too good to be true, it probably is. Anyone who claims that they can eliminate your credit card debt totally or reduce your payments by well over 50% should be treated with extreme caution. Be wary of requests to give up your financial details before they have told you exactly how they plan to help. Never give your financial information to anybody who cold calls you on the phone and says they can help. Close to 10 million Americans suffer from identity theft every year, and these "phishing" phone calls are one way for an unscrupulous company to obtain your data.

Some Banks and Creditors Will Erase Your Debt

There are cases in which banks and creditors will wipe out your debt, but usually only when they have decided they have absolutely no chance of recovering anything, even if they legally pursue you. If they do concede to wipe away your debt, your credit file will be severely damaged and your chances of getting new credit will be compromised, typically for at least seven years. On top of that, the IRS may pursue you for taxes on the money written off. This is not an easy way out; it is a last resort for desperate circumstances.

Don’t Pay Large Upfront Fees

Beware any debt consolidation company charging large upfront fees. Some companies offer to eliminate your credit card debt only in exchange for hundreds or thousands of dollars from you first. Find out how exactly they propose to help you before paying them a dime. Always be wary of anyone asking for money without explaining their exact methods for achieving results. And if they offer you bogus methods like the ones listed below, just walk away.

Debt Scam Method #1: Threaten Your Creditors with Legal Action

Scammers might offer to supply you with documents to present to your creditors that basically say you aren’t going to pay back your credit card balances because the debt wasn’t legal in the first place. There are variations of this argument, none of them valid. The track record of consumers winning that sort of case against creditors in court is, to say the least, not good.

Debt Scam Method #2: Stop Paying Your Creditors

Fraudsters might also tell you that banks and finance companies don’t bother pursuing people who stop paying their credit cards or loans. Well, that’s simply not true. And even if it was, why should you pay someone only to be told to do nothing?

It’s true that many banks don’t pursue your settlement themselves. They employ professional debt collecting agencies to do it for them and those companies do not give up easily.

Legitimate Help is Available

The best way of handling a debt problem is to approach your creditors yourself, sooner rather than later. Be honest with them and ask them to help. If there is genuine hardship, they may try to accommodate you. You are just as capable of wresting concessions from them as anyone – and without paying any fees.

If that is too much for you to take on, then there are many reputable companies out there who can help with debt problems. They can negotiate with creditors to accept a reduced settlement and mark an account as settled. This will still impact your credit, but not as badly as defaulting does. These legitimate debt counsellors will often take their fees as part of your structured payments, rather than as a lump sum.

The U.S. Department of Justice provides an approved list of credit counseling agencies, or try the National Foundation for Credit Counseling (NFCC). 

Once you decide you need help, act quickly before the problem gets any worse.