Debt relief scams: red flags and safer options

When debt feels overwhelming, an offer to make it disappear is tempting. Some companies provide a real service. Many charge large fees, damage your credit, and leave you worse off. Knowing the rules makes the bad ones easy to spot.

The upfront-fee ban

Since 2010, the FTC's Telemarketing Sales Rule has banned for-profit debt relief companies that sell their services over the phone from collecting fees until:

1. they have settled, reduced, or otherwise changed the terms of at least one of your debts;
2. you have agreed to that settlement or plan in writing; and
3. you have made at least one payment to the creditor under it.

The fee must also be in proportion to the debt settled or a percentage of the savings set in advance. A company that asks for money first, whatever it calls the payment, is a red flag.

Similarly, the federal Credit Repair Organizations Act bars credit repair companies from charging before they have fully performed the promised services.

Red flags

• "Guaranteed" results, such as a promise to cut your debt in half or remove accurate negative information from your credit report. Nobody can remove accurate, current information.
• "Stop paying your creditors" and "stop answering their calls." Debt settlement programs often tell you to stop paying and save into an account instead. Meanwhile late fees, interest, collections, and lawsuits pile up, and settlement is not guaranteed.
• "A new government program." Real federal programs are run through official .gov sites and do not need a paid middleman.
• Pressure and secrecy. Deadlines that expire today, or a request not to talk to anyone else about it.
• Requests for your FSA ID or passwords. Never share them.

Student loan "forgiveness" offers

You never have to pay for help with federal student loans. Applying for income-driven repayment, consolidation, or Public Service Loan Forgiveness is free through studentaid.gov or your loan servicer. Companies that charge for this, or that ask you to sign over a power of attorney, are a common source of complaints.

Settlement also has hidden costs

Even legitimate debt settlement can mean:

• a hit to your credit score while accounts go unpaid;
• collection lawsuits before a deal is reached;
• forgiven debt that may count as taxable income. Creditors generally send IRS Form 1099-C when they cancel $600 or more, and exceptions such as insolvency may apply, so ask a tax professional or the Taxpayer Advocate Service.

Safer, free or low-cost options

The word "nonprofit" alone does not guarantee quality or low fees. Ask about every fee in writing before you sign anything.

If you have been scammed

Report it to the FTC at ReportFraud.ftc.gov, to the CFPB, and to your state attorney general. If you shared personal information, visit IdentityTheft.gov. Browse every resource in the Debt Rolodex directory.