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.

By , Attorney

You might see ads for debt relief services, like debt consolidation, debt settlement, and debt management plans, on the Internet, radio, or television. If you're in dire financial straits, this type of service might sound like the perfect solution to your debt problems.

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.

Common Debt Relief Services Offered

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

How Do 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.

What Is Debt Settlement?

Some debt relief companies claim they'll work out deals with your unsecured creditors to reduce your debts significantly, often (supposedly) by 50% or more. To get this kind of reduction, they negotiate lump-sum settlements. As part of the process, the debtor has to make regular payments into a designated account rather than to creditors. Once the debtor has accumulated enough funds, the company starts the negotiations and 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 score gets worse. Defaulting on your debts will also likely lead to debt collection activities or lawsuits against you.

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 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 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.

How to Find an Accredited, Nonprofit Credit Counseling Agency

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

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

Getting Help From a Lawyer

Different kinds of lawyers provide services to help people deal with their debts. Two of the most common services that lawyers offer are representing debtors in bankruptcy proceedings 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.)

If you want to learn more about filing for bankruptcy, talk to a bankruptcy lawyer. To find out more about settling your debts, talk to a debt settlement attorney. Many bankruptcy attorneys and debt relief attorneys offer free consultations and will quote you a fee after evaluating your circumstances.

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