Debt Relief Company Red Flags

Debt relief or debt cancellation is the full settlement of debt, or partially preventing interests and charges to grow, owed by individuals, corporations, or nations.

If you’re in need of debt relief, knowing what to look for in a legitimate debt relief may ease the burden. Two things that can possibly happen: they can help solve your credit problem or making it worse. Fortunately, most nefarious operators have certain traits in common.

Here are some common debt relief company red flags.

Making Extraordinary Promises and Guarantees

Anybody guaranteeing they can settle your debts for pennies on the dollar is not on the up and up.

First of all, regardless of a firm’s past experience with any particular lender, all settlements are considered on a case-by-case basis. Thus, there is no guarantee your offers will be accepted. Further, while it’s true settlement firms do negotiate reduced payoffs, the average is around 21.5 percent. That’s hardly “pennies on the dollar”.

Claiming to Settle All Debt

Debt comes in two flavors; secured and unsecured. Most unsecured debt can be settled. This includes credit cards, charge accounts, medical bills and certain types of private student loans. However, secured debt such as mortgages and car loans are impervious to settlement because tangible items that can be repossessed back them. Public student loans cannot be negotiated either.

Bottom line, if you have a mortgage, a car loan or a public student loan, anybody promising to reduce all of your debt is lying.

Letting You Sign Without a Review

Legitimate debt settlement companies will take the time to fully review your financial situation before offering to take you on as a client. It’s the only way they can tell if your debt can be settled—or if your financial situation even warrants their services.

In some cases, your circumstances might be such that you can do debt consolidation or credit counseling. In others, bankruptcy might be your best option. Nobody can know this until they’ve reviewed your situation. Any company trying to sign you up without making this initial effort is operating unethically.

Charging Upfront Fees

The Federal Trade Commission’s Telemarketing Sales Rule makes it unlawful for debt relief companies to collect fees from you before they have settled your debts. They must also explain their fees and tell you about any conditions on their services before you sign up. Further, honest companies give you full approval over every deal and will only ask for payment after you sign off on a deal and the settlement is executed.

According to the Federal Trade Commission, all debt relief companies must make the following disclosures:

Price and terms: The company must explain its fees and any conditions on its services.

Results: The company must tell you how long it will take to get results — how many months or years before it will make an offer to each creditor for a settlement.

Offers: The company must tell you how much money or the percentage of each outstanding debt you must save before it will make an offer to each creditor on your behalf.

Non-payment: If the company asks you to stop making payments to your creditors — or if the program relies on you to not make payments — it must tell you about the possible negative consequences of your action, including damage to your credit report and credit score; that your creditors may sue you or continue with the collections process; and that your credit card companies may charge you additional fees and interest, which will increase the amount you owe.

Anyone neglecting to inform you of any of the above is operating in violation of the law and should not be trusted. Paying attention to these debt relief company red flags could well save you from making a bad situation even worse.

Charles Bell is a Los Angeles-based freelance writer specializing in finance. He studied journalism, business, and economics, and he continues to embrace those passions while building his freelance career. His areas of expertise include investing, startups, entrepreneurship, and trading.