Beware of debt settlement companies
If you’re deep in debt and need some expert advice, be wary of any company that promises to get rid of your debt. They’re debt settlement companies, and they can actually make your situation worse.
Perhaps you’ve seen their commercials on TV, with misleading marketing ploys like “New Government Programs!” or “Get out of debt in 24 hours!” You know the saying: If it sounds too good to be true, it probably is.
Here’s the gist: Debt settlement companies claim to help you pay off your bills for a fraction of what you owe. On top of charging exorbitant fees, they generally advise you to make monthly payments into a special account instead of paying creditors. They promise to use the cash to settle debts for pennies on the dollar, but in the end they usually just pocket your money. Their tactics could result in you losing your cash—or worse, facing a damaged credit score, deeper debt, lawsuits, and more.
If you need help, here are 5 steps to avoid a scam:
- Contact trustworthy organizations. Two that I recommend are the Financial Counseling Association of America (FCAA) and the National Foundation for Credit Counseling (NFCC). Either one can connect you to a reliable debt counselor.
- Choose a good debt counselor. The NFCC has a handy set of guidelines for selecting the right counselor. Remember that a good one will help you create a budget for free (before signing you up for additional paid services, such as a debt management program—see tip #3) and admit when bankruptcy is a good option (rather than keeping you dangling while they collect fees).
- Don’t confuse debt settlement with debt management. Your counselor may suggest a debt management program, whereby he/she strikes deals with your creditors to lower your monthly payments (and sometimes eliminate fees you’ve racked up), so that you can ultimately pay back 100% of your debt. This service won’t hurt your credit score or put you at risk in other ways. However, you’ll pay a monthly fee for the service (they vary by state, but generally won’t be more than $50). And even though it’s less risky than debt settlement, there are some scams associated with debt management, too, so proceed with caution.
- Avoid a counselor who tries to put you into a debt settlement or debt management program right away, since debt settlement is usually a scam and debt management can be expensive. You first want to be sure you’ve exhausted your other options, like making changes to your budget.
- Don’t sign anything until you get a second opinion! Call up another credit counselor in your state and ask their advice before moving forward with anyone. You can also check with the BBB to see if there are any complaints filed against the company you’re considering.
