The combination of a global pandemic and soaring inflation has left many Americans with mountains of debt. The total household debt in the U.S. rose by $351 billion (2.2%) to reach $16.51 trillion in the third quarter of 2022, according to the Federal Reserve Bank of New York. Credit card balances alone increased by $38 billion.
When you’re in debt, you may be desperate for a way out. And while there are legitimate debt settlement companies that can offer relief from your debt in some cases, sometimes, a company offering these services is actually a scam. Before handing over any personal information to a debt relief company, look out for these warning signs that it’s a fraud.
You Receive a Robocall From the Company
“If your initial contact with a debt settlement organization is by a recorded message stating that the firm can wipe off almost all of your debt, you don’t want to call them back,” said Lyle David Solomon, principal attorney at Oak View Law Group, who specializes in consumer finance and debt.
A fraudulent company will also try to get all of your personal information during the initial call.
“Asking for a commitment or personal information in the first call is a red flag,” said Josh Richner of the National Legal Center, a debt relief law firm. “This is your financial future at hand. If they expect you to make a decision in the first phone call, they’re either a scam or they don’t truly deserve your business.”
They Make ‘Guarantees’ About Lowering or Erasing Your Debt
When something seems too good to be true, it usually is — and this rule applies to debt settlement companies as well.
“In the case of credit card debt relief, scammers guarantee lower credit card interest rates,” Solomon said. “Consumers think the con artists are linked with their card company or a credit card chain, and they believe they can save hundreds of dollars in interest by doing so. When a company claims to be able to convince creditors to reduce your debt for a lower sum, it’s just hype with no evidence to back it up. According to the [Federal Trade Comission], ‘no one can promise that your creditors would forgive your obligations.'”
In addition to promising to lower your interest rates, a scam company may promise to settle your debts extremely quickly.
“[It’s a red flag if] the debt relief firm promises to lower or erase debt by a certain amount in a specific time. Debt relief can be a long, time-consuming process, and the time it takes to get out of debt varies based on your particular circumstances. It’s generally too good to be true if a firm offers to pay off your debt in a short period,” Solomon said.
A legitimate debt settlement company will advise you on budgeting and money management, negotiate concessions with creditors or set you up with a plan to put away money to pay down your debts, usually over a period of years, said Jeremy Heck, a debt and consumer law attorney at Luftman, Heck & Associates LLP.
“Scammers, on the other hand, offer sham ‘guarantees’ to get you out of debt quickly and cleanly,” he said.
They Charge an Upfront Fee
According to the FTC, charging upfront fees or a lump sum payment to resolve debt is illegal.
“When a company states it will only begin dealing with your creditors or provide other services after paying a fees, that firm is most likely bad,” Solomon said. “Before it resolves any obligations, the bogus debt relief organization demands money upfront. Never pay upfront without first completing any debt relief activity. Scammers are seeking a quick buck, and paying upfront is the simplest method for them to get your money without having to make any effort on your behalf.”
Legitimate debt relief firms charge for their services, but can collect only when they get results, Heck noted.
They Encourage You To Cease Contact With Your Creditors
An illegitimate debt relief firm might recommend that you stop communicating with your creditors.
“Breaking down communication with your creditors is a typical red flag, and it’s not only wrong but also dumb, because you’ll need to keep in touch with them to make sure your debt reduction plan is on track,” Solomon said. “The absence of that communication is a certain clue that con artists are at work.”
You Can’t Find Much Information About the Company and Its Services
An illegitimate debt settlement company will refuse to send you information about its services until you provide financial information, such as credit card account numbers and balances, Heck said. And even if they do send more information, it may be hard to verify their offerings.
“Search the state Division of Corporation records,” Richner said. “Be wary of companies with generic names like ‘settlement services’ or the like, as they can’t be easily verified.”
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