Beware of Debt Relief Services

But, in many cases, the for-profit companies offering these kinds of services are scammers who provide little or no help after you've agreed to pay them. Even if a debt relief company does help you, you'll have to pay a lot for services you could do yourself or would be better off paying an attorney or legitimate credit counseling agency.

Common Debt Relief Services Offered

Debt relief companies typically offer services like debt management plans, debt settlement, and debt consolidation.

How Debt Management Plans Work

Debt relief companies sometimes offer to arrange a plan called a "debt management plan" to pay back your creditors. These plans often include reductions in interest rates or other favorable terms so you can afford repayment.

Here's how a typical debt management plan might work: The debtor deposits money into an account each month. The debt relief company uses the money to make payments to the debtor's various creditors under the plan. In most cases, the debtor has to make regularly scheduled payments into the account for three to five years. The terms of most plans also require the debtor to pay the debt relief company a fee in addition to the monthly deposits.

You should generally avoid for-profit companies offering these plans. However, consider arranging a debt management plan with an accredited, nonprofit credit counseling agency (see below).

What Is Debt Settlement?

Some debt relief companies claim they'll work out deals with your unsecured creditors to significantly reduce your debts (supposedly) by 50% or more. To get this kind of reduction, they negotiate lump-sum settlements.

As part of the process, the debtor usually makes regular payments into a designated account rather than to creditors. (Or the company might have you open a savings account in your name and accumulate funds there.) Once the account has sufficient money available, based on the debt settlement company's opinion, the company negotiates lump-sum settlements with your creditors. The company pays the creditors—and often themselves—with money from the account.

How Debt Consolidation Works

Companies sometimes offer to reduce your monthly payments by rolling multiple loans together into one. This process is called "debt consolidation."

Why You Should Generally Avoid Debt Relief Services

Debt relief services are 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
• hurt your credit
• drop the ball when it comes to actually performing the services, or
• simply take off with your money.

Many of these scammer companies will advise you to default on your payments while they "negotiate" your debts. In the meantime, your credit scores get worse. Defaulting on your debts will also likely lead to debt collection activities or lawsuits against you.

Signs of a Scammer Company

If a debt relief company makes any of the following claims, it's most likely a scammer.

• The company guarantees your unsecured debts will be paid off at less than half their value.
• The company charges large monthly service fees.
• The company insists that communications to your creditors go through them and won't allow you to make direct payments to your creditors.
• The company assures you that you won't face creditor lawsuits.
• The company tells you that its services will improve or have no negative impact on your credit reports.
• The company claims it can remove negative information from your credit reports—even if the information is accurate.

Federal and State Regulation of Debt Relief Services

Some federal laws, like the Federal Trade Commission Telemarketing Sales Rule and often state laws, protect consumers from debt relief scams.

FTC Telemarketing Sales Rule

The FTC Telemarketing Sales Rule offers 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. 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 for Consumers

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 nonprofit organizations.

State laws that regulate debt relief services often:

• limit the fees that companies 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 their practices.

Talk to a Legitimate Credit Counseling Agency or a Lawyer

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

Getting Help From an Accredited, Nonprofit Credit Counseling Agency

Consumer credit counseling agencies are typically nonprofit organizations that offer help in managing unsecured debts. A consumer credit counselor can:

• go over your current financial situation
• help you to come up with a budget that manages your finances, and
• in some cases, develop a personalized debt management plan to deal with your debts, though the agency will likely charge a fee for this service.

How to Find an Accredited, Nonprofit Credit Counseling Agency

Here are a few ways you might go about finding a legitimate credit counseling agency:

• Look for a company that's 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 like counseling, budgeting, credit and consumer law, debt management, and bankruptcy.
• Ensure no complaints have been filed against the company with your state attorney general's office, the Better Business Bureau, and local consumer protection agencies.

Legitimate credit counseling agencies offer financial help for free or at a minimal charge.

Getting Help From a Lawyer

A few common services that debt lawyers offer are:

• representing debtors in bankruptcy proceedings (you might want to consider filing for bankruptcy to discharge your unsecured debts)
• debt management advice, and
• negotiating with creditors to settle debts. (Remember, 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 exist.)

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