Are debt relief programs legit? Yes. Debt relief, aka debt settlement or debt resolution, is a legitimate industry that can be helpful to people experiencing certain financial difficulties. However, there are bad actors looking to exploit vulnerable consumers who may be scared and susceptible to sneaky promises.
[SEE: Best Debt Settlement Companies]
How Debt Relief Scammers Fooled Their Victims
“Accelerated Debt” was a group of corporations, limited liability companies and individuals working together as a common enterprise to allegedly defraud veterans and older consumers. Here’s how they pulled off a $100 million scam and stole from thousands of victims, according to a complaint filed by the Federal Trade Commission in July:
— Fake “warnings.” Accelerated Debt providers posed as credit card issuers, government and consumer reporting agencies, telling consumers that their credit cards were compromised and needed to be closed.
— False promises. Accelerated Debt’s reps allegedly told their victims that they could reduce their unsecured balances by 75% to 85%.
— Illegal fees. A disabled veteran, says the FTC, was charged nearly $10,000 up front (which is prohibited by federal law), only to end up even deeper in debt. He had to use his retirement income and savings to cover it.
— Unauthorized checks. Remotely created checks, or RCCs, are paper checks made by the payee, not the customer — and it’s fraudulent if these checks are issued without the customer’s authorization, as the FTC is alleging here.
— Privacy violations. The FTC accused Accelerated Debt partners of unlawfully obtaining and using consumers’ credit reports.
— Telemarketing violations. The group called consumers listed on the national Do Not Call registry and didn’t transmit caller IDs.
— No disclosures. Accelerated Debt partners did not issue disclosures required by the Telemarketing Sales Rule.
— More lying. They made false statements to get consumers to provide their account numbers.
— No relief. Accelerated Debt is accused of failing to provide the debt relief services it promised.
The scary thing is that, in most industries, there’s always another scam around the corner. But the red flags in this case are pretty obvious. And once you know them, you’ll see these dodgy companies coming from a mile away.
[Read: Best Debt Consolidation Loans.]
So Much Lying: How to Spot Debt Relief Red Flags
Here are the red flags that indicate a debt relief scam, according to real debt relief experts.
Silly Advertising
If a pitch from a debt relief company sounds like the headline from a supermarket tabloid, feel free to laugh at it — but don’t give that company any of your information and don’t click its links. Howard Dvorkin, CPA and chairman of Debt.com, shares an example that we’ve probably all seen in one form or another: “‘Learn about the government program the government doesn’t want you to know about!’ Why would the government create a program to help people and then keep it a secret? Avoid companies making such outlandish promises,” Dvorkin says.
Jason Pack, chief revenue officer at Freedom Debt Relief, agrees. “If a company touts a ‘government program’ to erase credit card debt, walk away; no such programs exist,” Pack says.
Other advertising tricks, says Pack, include “sites that may contain long articles and appear to be legit review sites, but are not. Words and phrases such as ‘sponsored content’ and ‘ad’ or other disclaimers indicate that the ‘reviews’ really are paid advertisements.”
Intense Pressure
Most legitimate debt settlement companies have been around for some time and use tried-and-true tactics to negotiate with your creditors. You won’t hear them tell you that you must “act now!” or “sign up today!” Your debt will probably still be there tomorrow, and so will reliable companies. They want you to ask questions, do your research, and feel comfortable with the process and with them.
Scammers, on the other hand, don’t want you asking questions, don’t want you to “think it over” and don’t want to disclose the cost of the program and how long it will take. They’ll try to hurry you along and hope you don’t push for details. They may also try to persuade you to stop communicating with your creditors, Pack says.
“The last thing an indebted consumer seeking professional help needs is to be baited into a new financial scam,” says Leslie Tayne, founder and head attorney at Tayne Law Group. “Red flags from disreputable debt relief companies often include high-pressure tactics to act fast … and not putting the details in writing.”
Money for Nothing
One of the hallmarks of bad actors in debt relief is requiring up-front fees before the service has been performed. Do not give money or information to any company that requires up-front debt settlement fees.
“Federal Trade Commission rules include an advance-fee ban,” says Pack. “This rule prohibits a debt relief company from collecting any fees until it has negotiated a settlement and the customer has accepted that settlement. Companies cannot earn revenue until they do what they’ve promised.”
Crazy Claims
Another debt settlement red flag is promising a specific percentage of forgiven debt, like the 75% to 85% claims Accelerated Debt allegedly made. Debt and bankruptcy lawyer Ashley F. Morgan says a debt relief company should not be making such guarantees. “You can never be certain a creditor will settle, and guaranteeing any specific resolution is a big red flag.”
Claims that you’ll pay just “pennies on the dollar” or that debt settlement can “stop collection calls or lawsuits instantly” or other blanket statements are bad signs in a debt relief provider.
Ilir Salihi, founder and senior editor of personal finance site Income Insider, says you can often root out bad providers in about 10 minutes. “Start by looking up the company with your state attorney general and consumer affairs office. … Then, get every fee and timeline in writing before you enroll. Any high-pressure tactics, tacked-on fees or up-front charges are signs that you should run.”
[READ: 7 Steps to Paying Off Debt]
Find a Legit Debt Relief Provider
Once you know what you don’t want to see in a debt settlement provider, you can focus on the signs of a reputable debt settlement company. Here’s how.
Experience
Experience matters, says Pack, so find out how long the provider has been in business. “The real value of debt settlement is in how effective the negotiation is. A business with a solid history and long-term experience working with your creditors usually means greater skill and expertise.”
Dvorkin also mentions the value of experience. “Check to see that they’ve been in business for at least a decade.”
Reputation
You’ll also want to look at professional provider reviews and ratings from consumers from sites like Trustpilot. Dvorkin recommends only working with companies that have at least an A rating from the Better Business Bureau. If a company has bad reviews or no online presence at all, it’s probably a bad sign. Luckily, there are enough reputable providers in business that you don’t need to compromise.
Commitment
Debt relief providers can demonstrate their commitment to the industry with active membership in groups — such as the International Association of Professional Debt Arbitrators and the Association for Consumer Debt Relief — that maintain standards for conducting debt settlement business.
“Companies do not have to be members of trade organizations to be legitimate,” Pack says. “However, membership in the Association for Consumer Debt Relief can be a good sign of a reputable company.”
“Consumers should be able to verify the professional and/or their organization through their state bar association, attorney general’s office, consumer protection agency or through the Better Business Bureau, along with social media like LinkedIn,” Tayne says.
Communication
This is a big one. Debt relief customers who leave reviews prize communication and transparency. You want a company that acknowledges the limits of what it can do and the downsides as well as the advantages of debt settlement. And you want a debt advisor who works with you, offers a plan you can live with and who explains everything to your satisfaction.
“The debt consultants with whom you work at a debt settlement company should be able and readily available to answer any and all questions about how the process works, what to expect, how many creditors the company has settled debts with and what the fees will be,” Pack says. “Ask about results. In talking with a company, ask for results it has obtained for clients. A reputable company will be open and honest about its process and results.”
Solution
Be comfortable with the plan you and your debt counselor work out, and have a good idea of the time frame involved.
“If a debt relief agency is making estimates on debt settlement without reviewing your budget and/or details about what creditors you are owing, they are not setting you up for success,” Morgan says. “If the debt relief agency is estimating a payment of $700, but you only have $300 left over after necessary expenses each month, you are not going to be able to survive in the debt relief program.”
Is debt relief real? Absolutely. Debt settlement is the right financial solution for some but not all consumers. And it’s not a risk-free fix for overwhelming debt. To give yourself the best chance for success, you’ll want a reputable company in your corner.
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FTC Busts Illegal Debt Relief Operation: Here’s How to Protect Yourself originally appeared on usnews.com
