In Debt? Beware of These 5 Scams

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Consumer complaints about debt relief providers have doubled since 2007. And the Federal Trade Commission has sued more than a dozen debt relief providers for bilking consumers in the past few years.

The cases are diverse. Some involve for-profit companies posing as non-profits operating with Uncle Sam’s seal of approval. Others are on the legal docket for pumping up fees.

While unscrupulous debt relief companies deserve any punishment coming down on them, it might not help consumers all that much. After all, by the time you complain, it’s usually too late, leaving a hole in your wallet that likely won’t be replaced.

So how do you play debt relief scams? In a word, with foresight. Here are some red flags that could mean you’re being fleeced by your debt relief provider. If you’re faced with any one of them, tell the debt relief firm to take a hike — and you take one, too.

Watch out for one-offs. Anyone who promises they can deliver a one-time settlement on your debt with all of your creditors — especially at a deep  discount — also has a bridge to sell you in Brooklyn. This is a big red flag.

Don’t fall for "special" accounts. The best way to get your debt level down is to pay your creditors directly. But unscrupulous debt servicers may ask you to start pouring money into a special account managed by the debt servicer, who in turn will make the payments for you. Usually there is a big fee attached to this service. Don’t fall for it. A typical scenario is that the debt relief provider doesn’t pay the debt — meaning interest and penalties continue to climb. Paying your creditors straightaway is the best way to go.

The "non-profit" scam. Some debt relief providers claim to be a nonprofit, altruistically there for you to cover your debts, with no profit motive for them. Consumer protection agencies are beginning to find that some of these nonprofits are actually for-profits, and are prosecuting them accordingly.

Watch for referral fees. Some debt servicers will ask you for a referral fee of several hundred dollars, claiming that they can get you direct legal and/or financial help at the highest levels. Again, don’t fall for it. Often, the money doesn’t go anywhere but into the pockets of the debt relief provider.

Ignore interest rate fees. Some shift debt servicers may ask you for an interest rate fee, which goes toward negotiating with lenders for a lower rate on your debt. The likely scenario? The debt servicer comes back to you and says the lender rejected the request — but the debt relief provider keeps the fee, anyway.

In the end, you’re likely better off relying on a reputable, nonprofit credit counselor. Start with the National Foundation for Credit Counseling’s free Web site. There you can find useful advice, free of charge, as well as a certified credit counselor if you need one.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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