The Better Business Bureau released a report recently claiming that consumers that are looking for debt relief should definitely be wary of some of the deceitful companies that are out there.
But it's not just the BBB who’s sounding the alarm. The U.S. Government Accountability Office just came out with the results of an undercover investigation of the industry. It found that a handful of debt relief companies are engaged in "fraudulent, deceptive and abusive practices." In April, legislation was put forth by New York Senator Chuck Schumer in an attempt to regulate the industry.
Now it's not as if every debt settlement company is a scam. The truth is that it's a viable financial service for those that don't have the time to deal with it, or don't have the patience to negotiate with their creditors. There are however
How Debt Relief Scams Works
The debt relief company has you set up an account to deposit money. They suggest that you stop paying all of your creditors and instead put all of that money into your debt relief account. They explain that this money will go to settle all of your debts within 6 to 36 months. I would not hire ANY DEBT SETTLEMENT COMPANY THAT WANTS YOU TO OPEN A NEW ACCOUNT.
Stopping payment to your creditors might be the worst bit of financial advice that anyone can ever give you. Especially coming from someone who's supposed to be a financial expert. This will absolutely ruin your credit profile and ultimately your credit score. Just one missed payment can lower your score over 100 points, imagine what this tactic will do.
The reason that the debt relief companies have you do this is because creditors are much more willing to negotiate payments after you've been late for a few months. There's no reason for creditors to negotiate with you if you've been paying on time.
Not only are you destroying your credit profile and your borrowing power for the next several years, but you're running the risk of litigation. If your creditors sense that you've stopped paying them in an attempt to pay them less, they can take you to court and even garnish your wages.
What to Watch For
High upfront fees are a sure warning sign that a debt relief company is more worried about their own bottom line than they are about trying to dig you out of debt. Some companies charge 15 to 20 percent of your total debt before they're even willing to start work on your accounts. Plenty of ethical, reliable firms will charge you 5 percent.
Settling your accounts wholesale. Telling you to stop making payments is a terrible option. The best advice a debt relief company should give you is to continue paying off accounts you're current on, and settle those accounts that have gone to collections or are several months late already.
Excessive promises that seem too good to be true probably are. Commercials run all the time about cutting your debt in half, or getting you out of debt quick and easy. If you're in debt then there is no quick, easy or cheap way out. You've made your bed, now you're going to have to lie in it.
Sure debt relief companies can help you out, but you need to be prepared to actually pay off your debts, work hard and budget properly, and do so ethically, without having to ruin your credit in the process.
Do your homework before you chose a company. The BBB is a good place to start. Make sure their complaints are low and their overall rating is at least an "A" before you even give them a call.
