It shouldn't be a shock to you or anyone else that debt settlement scams exist. Anytime there are people who are in financial difficulty and hence a vulnerable state, there will always be other people and companies that look to take advantage of them. And although it is impossible to completely avoid these scam artists, there are steps you can take to reduce your chances of being taken for a ride.
The first step in avoiding debt settlement scams is to educate
yourself. More specifically, you need to educate yourself about all
of your debt help options before deciding on a solution. And remember, no matter what
debt solution you choose, the road to debt freedom starts with you.
Second, don't expect to contact a debt settlement company and get an unbiased
consultation as to which debt relief plan best suits you. You won't. Most companies that settle consumer debt, do only that.
They do not offer any other debt help solutions. The only way they make
money is by getting you into their program. So chances are, no matter
what your debt situation, they will advise you that negotiating
settlements on your debts is the best option, when quite frankly there
is likely a better solution.
Here's a look at some of the more common debt settlement/negotiation scams that you should be aware of.
In most cases, debt settlement companies do little or no work on your
behalf at the beginning of the program. So if you pay them a large up front fee and
ongoing monthly fees, what is their incentive to get to work on settling your
A good comparison would be hiring a real estate agent. Would you pay a
Realtor a large up front fee and an ongoing monthly fee to sell your
house? Of course not. You would want to pay them after they completed the job, ie. sold your house. If you paid them upfront
their incentive to work hard, get you the best deal or even complete
the job would be diminished.
The solution? Make sure that you pay the bulk of the fees after the debts are settled.
Therefore, the more people they sign up for the program, the more they get paid. And unfortunately, this is a significant contributing factor to one of the biggest debt settlement scams. Enrolling people in debt settlement programs who should not be enrolled.
The percentage of people who are in debt and for whom debt settlement makes sense as a debt relief option is actually quite small. Unfortunately, smooth talking salespeople often only have one thing in mind, (their commission) and as a result many folks end up in a debt settlement program who should never be there.
One of the "techniques" that debt settlement salespeople use is to "oversimplify" the process of debt settlement. When someone who has significant unsecured debt, and seemingly no way to get rid of it, is told that they could be debt free in 18 to 24 months, and pay as little as 40 cents on the dollar, they often jump at the opportunity. Unfortunately, they are not properly informed of the exact debt negotiation process, and often find out too late that it will not work for them.
When you stop paying your creditors upon entering a debt settlement program, they can and will (if they think you have assets to go after) sue you. If they win, they can garnish your wages and go after your assets. If a debt settlement company fails to explain these potential consequences to you right up front, look elsewhere.
Fee structures for companies in this business are all over the map. Some charge up front, some charge monthly fees, some charge flat fees, some charge a percentage of the total debt, others charge a percentage of the amount saved, etc. Some unscrupulous companies try to hide their fee structures in the fine print of the contracts, so make sure that you read everything carefully.
As I mentioned earlier, in the beginning stages of the process of settling debts, not much happens. In fact in many cases nothing happens for the first 6 months. And because a debt settlement company cannot guarantee that they will actually settle your debts, you may pay significant fees over the first 6 months of the process only to be left with no settlement, worse credit, and higher debts due to interest and penalty charges.
The best advice that I can give you is buyer beware. Do your homework and educate yourself. There are two other things I recommend.
1. Speak to a credit counselor. A credit counselor will assess your financial situation and can advise you on your other debt relief options besides debt settlement. Most will offer a free initial consultation, and help you prepare a budget.
2. Speak with a bankruptcy attorney. If you are a candidate for debt
settlement then you are likely a candidate for bankruptcy as well. A
lawyer can explain the pros and cons of both bankruptcy and debt
settlement and help you decide which is more appropriate for you.
Ideally you want to speak with a lawyer who offers both debt settlement
as well as bankruptcy filing.
Following these two steps will take you a long way towards avoiding debt settlement scams.