Beware of Debt Relief Services

Learn about debt relief services, regulations affecting these types of services, why you should generally avoid them, and alternatives to using a debt relief company.

Debt relief services, like debt consolidation, debt settlement, and debt management plans, are advertised all over the Internet, radio, and television. But, in many cases, the for-profit companies offering these kinds of services are scammers who provide little or no help after you've paid them. Even if a debt relief company does try to help you, you'll have to pay a lot for services that you could do yourself or would be better off paying to an attorney or legitimate credit counseling company. (Legitimate credit counseling agencies offer financial help for free or at a minimal charge.)

Fortunately, federal laws—like the Federal Trade Commission Telemarketing Sales Rule—and certain state laws provide some protection from debt relief scams. Read on to learn about debt relief services, the regulations affecting these types of services, why you should generally avoid debt relief services, and alternatives to using a debt relief company.

Debt Relief Services

Debt relief companies typically offer services like:

Debt management plans. Debt relief companies sometimes offer to arrange a plan—called a debt management plan—to pay back your creditors, often with reductions in interest rates or other favorable terms so you can afford repayment. (Learn about the pros and cons of debt management plans.)

Debt settlement. Other debt relief companies claim they’ll work out deals with your unsecured creditors to significantly reduce your debts, often by 50% or more. They do this by negotiating lump-sum settlements. As part of the process, you have to make regular payments into a special account, rather than to your creditors. Once you've accumulated enough funds, the company starts the negotiations and pays your creditors—and often themselves—with money from the account. (Learn more about debt settlement companies.)

Debt consolidation. Companies sometimes offer to reduce your monthly payments by rolling multiple loans together into one. (Learn about the pros and cons of debt consolidation.)

Why You Should Avoid Debt Relief Services

Debt relief services are also sometimes marketed as credit counseling services, debt elimination services, or debt negotiation services. But no matter what a company calls its particular services, all too often for-profit debt relief companies charge high fees for services you could do yourself, drop the ball when it comes to actually performing the services, or simply take off with your money.

Federal and State Regulation of Debt Relief Services

The Federal Trade Commission (FTC) Telemarketing Sales Rule and certain state laws provide protections from scammer debt relief companies.

FTC Telemarketing Sales Rule. The FTC Telemarketing Sales Rule offers some limited protection against abusive for-profit debt relief companies. Among other things, the Rule:

  • prohibits covered debt relief services from collecting fees until the company settles, alters, or reduces the debt
  • requires particular disclosures when marketing debt relief services, and
  • prohibits specific misrepresentations.

The rule only applies to for-profit companies, services related to unsecured debts, and services rendered after the debt relief company calls you or you call in response to an advertisement—not if the company communicates with you through the Internet or the mail. Though, the rule also usually applies when the customer initiates a call in response to the company’s advertisement through the mail or an email.

State protections. Almost all states regulate debt relief companies, and some states prohibit debt settlement companies from doing business. These state laws usually don’t apply to lawyers and nonprofits, however.

State laws that regulate debt relief services often:

  • limit the fees that agencies can charge
  • require written contracts
  • require that the debt relief company keep consumer payments in a separate trust account
  • require debt relief companies to post bonds, and
  • restrict certain practices.

Talk to a Legitimate Credit Counseling Agency or an Attorney

Rather than hiring a for-profit debt relief service, if you need help negotiating with creditors or debt collectors, consider talking to an accredited, nonprofit credit counseling agency or a reputable attorney.

Finding an accredited, nonprofit credit counseling agency. Here’s how to find a legitimate credit counseling agency:

  • Look for a company that is accredited, usually by the Council on Accreditation (COA) or the International Organization for Standardization (ISO).
  • Consider using a member of the National Foundation for Credit Counseling (NFCC), which is accredited by the COA.
  • Find out if the counselors working for the agency are certified by an independent agency, which means they’ve passed a certification exam that tests for understanding in areas such as counseling, budgeting, credit and consumer law, debt management, and bankruptcy.
  • Check to make sure there aren’t any complaints filed against the company with your state attorney general’s office, the Better Business Bureau, and local consumer protection agencies.

Hiring an attorney. Debt relief attorneys also provide many kinds of services to help people deal with their debts. Two of the most common services debt relief attorneys provide are representing debtors in bankruptcy proceedings and negotiating with creditors to settle debts. (Keep in mind that if you settle a debt for less than you owe, you might face a tax liability. The IRS generally considers canceled debt of $600 or more as taxable, though exceptions to this rule exist.)

Debt relief attorneys also sometimes provide other types of services to debtors including:

Many bankruptcy attorneys and debt relief attorneys offer free consultations and will quote you a fee after evaluating your circumstances.

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