Consumer Alert: Beware of Debt Scammers

With so many Americans unemployed or under-employed, the social stigma of debt is not as harsh as it once was. Too many people who have played by the rules and worked all of their lives now find themselves deeply mired in debt. Young consumers, armed with a degree in one hand and student loans in the other, wonder when they can afford to live independently from parental support. In this still-unfolding financial recovery, family standards of living are faltering, retirements are delayed and both generations worry.

For many consumers, the debt dilemma is akin to a seesaw. One side wonders whether available funds will stretch far enough to pay their bills. The other side worries whether remaining credit can see them through.

Unfortunately, there are businesses that prey upon consumer financial misfortunes, promising easy solutions to nagging and deep debt. On urban radio and late night television these companies advertise how debt can be settled for pennies on the dollar. Some will even identify the amount of debt consumers must owe before they can 'help' them.  

Consumers who believe this kind of advertising almost always get scammed. After paying thousands of dollars in fees, they discover that there was never a connection between the monies paid and real debt reduction services. Unfortunately, by the time this epiphany occurs, consumer   finances are in worse shape than before.  And the debt settlement firm moves on to its next victim. 

Consumers using these services are also often told not to speak with their creditors or pay them directly any portion of the debt owed.  If the consumer follows the instructions of the debt settlement firm, penalty interest rates – as well as late fees and other charges begin to accrue on the amount originally owed. In the meantime, the creditor often escalates collection efforts as well, sometimes turning the debt over to a collection agency hired by the creditor or pursuing lawsuits or wage garnishments.

If consumers stop paying their debts, their credit scores fall and make it more difficult to gain credit elsewhere.

These practices have been challenged in private litigation, by attorneys general and Federal Trade Commission enforcement. With the Consumer Financial Protection Bureau, consumers have also gained a federal office dedicated to transparency and fairness in debt relief and debt collection.  

The Federal Trade Commission also advises consumers to guard against further fraud by debt relief firms by avoiding any company that: 

Charges any fees before it settles your debts;

Guarantees it can make your unsecured debt go away and stop all debt collection calls or lawsuits; 

Tells you to stop communicating with your creditors;

Guarantees that your unsecured debts can be paid off for just pennies on the dollar; and

Refuses to send free information about the services until you provide personal financial information, such as credit card account numbers, and balances

For most people, money has a way of going more quickly than it comes. When debt is involved, bills seem to reappear even faster. The better way to resolve unmanageable debt is the simple one: speak directly with your own creditors to set up a manageable payment plan.

No one is better able to communicate your financial constraints than yourself. More importantly, no one will work harder to relieve your personal financial stress more than you. 

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Charlene Crowell is a communications manager with the Center for Responsible Lending.