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Scammers are the worst. They look for people in financial trouble and exploit their problems to line their own pockets. While there are many legitimate nonprofit agencies hard at work helping everyday people take control of their debt, there are also those whose sole goal is to profit from others' financial pain.
Let's say you're deeply in debt and looking for a reasonable way to become debt-free. You search online and find a company that not only promises to help pay off your debt, but they assure you that if you sign up, they will completely wipe your debt away. After months (or years) of feeling weighed down by debt, the promise may feel tempting -- miraculous even.
These companies tell you that they know how to legally get rid of credit card debt, personal loans, tax liens, and other debt types. They promise that the process is quick, legal, and won't damage your credit.
These companies are lying.
How the scam works
Once they have you hooked, debt elimination scammers tell you how much it will cost for them to work their "magic." But hey, they offer to let you charge the fee. Since they're promising to eliminate all credit card debt, it's like you'll receive the service for free.
In one version of the scam, a company representative gives you a song and dance about the debt being "illegal." They'll tell you they can prove that lenders have violated federal law. They will also try to convince you that lenders won't risk being "found out" by suing you.
If you're desperate to be out of debt, you may do the scammers' work for them by buying into anything they say. Here's why you should not do that:
- Other than bankruptcy, there is no legal way to wipe out all of your debt. In fact, some debts cannot be discharged through bankruptcy.
- Your credit score takes a hit every time you miss a payment or make a partial payment. No matter what a scammer tells you, there is no way around this simple truth.
- When a lender figures out that you are no longer making payments, they will turn you over to a debt collection agency or sell your debt to a third-party debt buyer. These parties will do everything within their legal power to collect the money owed, plus fees.
- Once you figure out that you've been scammed, you can be sure that no one from the debt elimination company will want to speak with you. After all, they already have your money.
Debt settlement companies work differently. Like debt elimination companies, they seek those deeply in debt and exploit their situation. These companies tell you they can settle all of your debt for a fraction of what is owed. If you are overwhelmed by the amount of money you owe, the promise may sound too good to be true. It is.
How the scam works
Before any debts are "settled," the company requires that you make upfront nonrefundable payments. They tell you that they're building an "escrow account" that will be used to settle with your lenders. They also ask you to stop paying your debts and to avoid speaking with your lenders. They promise that after 12 to 18 months, there will be enough in your escrow account to settle all your debt. Part of the con is making you believe that your lenders will be so desperate to receive any money, they will agree to the settlement offer.
According to the Illinois Attorney General's office, many debt settlement customers are sued by their creditors. So now, in addition to owing the original debt and fees, you're hit with court judgments and wage garnishments. As if that's not scary enough, a court judgment could lead to a lien on your home.
Any debt settlement company that asks you to pay upfront or make payments to them for services rendered knows that they're breaking the law. In 2010, the Federal Trade Commission established a rule banning settlement companies from charging fees of any kind until they can prove they have settled at least one of your debts.
Alternative, real help
There are real, honest-to-goodness nonprofits that can help you take control of your budget. They can even negotiate with your lenders for things like a lower interest rate, lower payment, and longer payment term. Their trained counselors can help you learn to budget, plan for life after debt, and even get down to the root of the problem by figuring out how you got into debt in the first place. They provide educational materials and work with your specific situation to give you financial hope and confidence.
If you find yourself in too deep, contact the National Foundation for Credit Counseling through their online portal or give them a call at 1-800-388-2227.