Avoid Debt Reduction Scams

The debt reduction vultures are circling. Yep, it's a shame, but bad economic conditions are great times for a certain breed of company that preys on the financially weak.

The Federal Trade commission has gone after companies citing the following examples of fraudulent business practices:

• misrepresenting how much they could reduce consumers’ debt
• not disclosing to customers that taking their advice to stop paying creditors would likely get them sued
• not disclosing that account balances would grow from interest, rate increases, late fees, and other charges
• falsely advising their customers that negative entries  on their credit reports from participating in these programs would be removed once the program was completed.

There's a great, real-life example over at Me Vs Debt, a blog by a twenty-something female mechanical engineer. In her article, "My Dumbest Purchase Ever... Debt Reduction Scam", she explains that while a full-time student, she was having a difficult time making her rent payments and other bills. After racking up $3000 in credit card debt, she became depressed and ended up spending $400 with a debt reduction company.  The company made some promises to reduce her payments, but never delivered...and ultimately, the company disappeared.

So, does that mean that every one of these services is a scam? No.  Every business niche, from auto dealership to doctor's offices, has it's share of bad apples.  The Federal Trade Commission offers this advice for those that are unable to fix their debt problems by themselves:

If you’re not disciplined enough to create a workable budget and stick to it, can’t work out a repayment plan with your creditors, or can’t keep track of mounting bills, consider contacting
a credit counseling organization. Many credit counseling organizations are nonprofit and work
with you to solve your financial problems. But be aware that, just because an organization says it’s “nonprofit,” there’s no guarantee...

Be leery of a credit counseling company that:

• pressures you to provide "voluntary contributions"
• won’t send you information about their services without requiring personal financial information, like account numbers and balances.
• try to sell you a specific program without taking the time to review your specific financial situation.
• offer to enroll you without training in budgeting or money management

Look for companies that:

• Are accredited with either the Association of Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.
• Offer low upfront fees...Consumer Credit Counseling Services typically charge a $10-25 set-up fee.
• Offer you good, but realistic advice.  The assistance is there, but there is no magic.  A company that promises drastic reductions in your payments or balances is likely not telling the truth.

Other Resources:

See our other articles on Debt Reduction.