People facing financial distress often opt for debt relief options like debt settlement in order to reduce their financial obligations. Where such strategies can work wonders, there’s a downside to them too. For example, unfortunately there are multiple fraud debt settlement companies out there waiting to prey on vulnerable customers who are in dire need of help. In a nutshell, the debt relief area is very ripe when it comes to scams. Most of the time, these companies make false financial freedom promises to lure their customers only to leave them in a worse financial shape.
If you want to protect yourself and your finances, it is of utmost importance that you understand how these scams work in the first place. Today we are going to talk about some of the most common scams, how they work and what to do if you find yourself falling victim to one.
How Debt Settlement Actually Works?
For starters, you should know the right path of a debt settlement. It’s a negotiation between you and your creditor to reduce your debt. You have to pay a lump sum of the total debt and your creditor then forgives the rest of the pending payment, marking your account as “settled”.
In case you don’t feel like negotiating with your creditor yourself and are scared of the deal falling apart then it’s best if you simply hire a debt settlement company. A reliable settlement company won’t make any false promises and won’t ask for any fee upfront. Once the deal goes through and your creditor agrees on your settlement terms, you then have to pay a decided fee to the company as per your contract.
Common Debt Settlement Scams To Be Aware Of
1-The Upfront Fee Scam
Before performing any services, if the company is charging you a large fee upfront, it’s a scam. As per the FDCPA (Federal Trade Commission), it’s illegal for companies to charge their customers any fee before finalizing a settlement deal with the creditor. Once the company has reduced your debt, you should then pay them their fee.
Red Flags
- Requesting payments before rendering services
- No written contract and terms
- Vague responses about fee structure
What Can Be Done: You should never pay any fee upfront. A legitimate company will only charge you once the debt has actually been reduced or settled.
2-The Government Affiliation Scam
Any company claiming that they are endorsed by or affiliated with the government is a scam. They mostly use logos and languages that resemble the government websites in order to gain your trust. It sometimes gets really difficult for people to identify if it’s a scam or the company really is associated with the government.
Red Flags
- Claiming any special government program that doesn’t really exist.
- Fake sounding names like the “Official National Debt Settlement Company”
- Use of government logos and names without any verification.
What Can Be Done: The US government doesn’t run or endorse any debt settlement programs. If a company claims so, you should first do your math and verify with the official website of the government. If you don’t find anything about the company on the website, it’s best if you step back and avoid hiring.
3-The “Guaranteed” Settlement Scam
Debt settlement is a negotiation and your creditor isn’t really obliged to accept your settlement offer. In a nutshell, no one can guarantee you if the deal will go through or not and if some company is promising you a “guaranteed settlement” then it’s definitely a scam. Scammers often make false promises too like they’ll claim that they can get your debt reduced by 70% to 80% which really is an unrealistic figure.
Red Flags
- 100% guaranteed reduction in debt
- Promises that’ll sound too good to be true
- Not discussing your financial situation in detail
What Can Be Done: You should always be skeptical if a company “guarantees” you any results. A reliable company will always explain that the success of the negotiation solely depends on the creditor and your ability to make your payments.
4-The “Withholding Your Payments” Scam
If a company is advising you to stop making your payments to the creditor and instead direct the payments to them then it’s another fraud that you have to be careful about. They mostly claim that they are negotiating with your creditor but at your back, they are just pocketing your money.
Red Flags
- Collecting “maintenance” fee from you every single month
- No proof of any ongoing negotiation
- Ignoring your collection notices or lawsuits from your creditor
What Can Be Done: You shouldn’t stop making any payments to your creditor unless you have a proper verified settlement plan. In order to confirm whether the negotiation is in place or not, you should check with your creditor first.
5-Debt Consolidation Impersonation Or Modification In Your Loan
Scam companies often offer debt consolidation services or loan modification but instead of that, they’ll just sign you up for illegal or fake debt settlement programs that can lead you to lawsuits or more debt.
Red Flags
- No license for debt settlement or consolidation services
- Confusing you between debt settlement and debt refinancing
- Misleading you with unrealistic offers like extremely low interests.
What Can Be Done: Understand the offer of the company in detail and ask for written verification. Make sure to read the fine print and only proceed when you really are comfortable with the services.
6-Phantom Debt Relief Companies
Scammers sometimes pose as real debt relief companies. They’ll take away your personal information or collect fees from you and then they’ll disappear. They use such information either to get money out of your pocket or for identity theft.
Red Flags
- No verifiable contact information and no physical address
- Putting pressure on customers to “Act immediately”
- A sketchy website or a business name that’s not registered.
What Can Be Done: You should always check with the Better Business Bureau (BBB) or the FTC first to verify whether the company is legitimate or not. In case you aren’t sure, ask the company for their license and get a clear picture of their services.
Best Ways To Protect Yourself Against Debt Relief Scams
Debt relief programs like debt settlement are no less than a new financial lifeline but only if you know how to use it right. When working with a debt settlement company, you must do your research properly and ensure that you are working with the right professionals who really can help you regain financial control.
Here are some effective ways to protect yourself against scammers;
1-Do Thorough Research
Before hiring a debt settlement company, you must check their online presence, verify their physical location and ensure that it’s a legit company. You can use multiple platforms to do your research like BBB, Trustpilot or simply check with your state’s consumer protection office.
2-Ask For Their License
In some states, it’s important for debt settlement companies to be registered or have a license to provide their services. To make sure that it’s an authentic company that you are working with, you should ask for their license and verify the information.
3-Get Everything Documented
Your contract should be provided to you in written form with all the important details mentioned including the fees, the timeline and the possible outcome of the settlement. Even the risks involved should be documented in order to protect your financial future.
4-Take Your Time
Never rush the process when you are entering into a debt settlement negotiation with a company. Scam companies u
Final Verdict
When you are already financially vulnerable, it’s important that you take measures to be extra careful and protect yourself against scam debt settlement companies. At Mountains Debt Relief, you won’t have to face any such issues because we have been working in this field for decades now and we understand how difficult things are for our clients. At our company, we make sure to provide the best possible services with the best outcomes.
FAQs
Q1. Is It Illegal For Debt Settlement Companies To Charge Upfront Fee?
Yes, in most cases, it is illegal for debt settlement companies to charge any fee upfront. They can only charge their customers once the debt has been reduced or settled with the creditor.
Q2. Are Non Profit Debt Relief Programs Safe?
Yes, in general they are safe but you should still first verify their location and credentials. These counseling agencies are often associated with the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC), so you should do your research first.
Q3. Will Using A Debt Settlement Company Hurt My Credit?
Debt settlement overall does damage your credit even if you do it yourself. This happens mainly because you have to stop making payments to your creditor before the settlement to make a more convincing case. Once the debt has been settled, you can then take measures to improve your score with time.