Debt Consolidation Scams on the Rise

In the many e-mails I receive from folks dealing with debt problems, I often hear that they are looking into debt consolidation or have tried it in the past with little success.  As the New Year has arrived, I know many of us have made resolutions to manage our finances better and stay on top of our financial fitness and goals.

You may see debt consolidation is a positive step to take towards inching your way out of debt.  Be very careful and wary of these companies!!  Many heavily advertise on the internet and have so called “experts” pimping their services under the guise of helpful advice and “free” websites where you have to “opt in”, ie. give them your e-mail address so you can get their “free report.”

Before you consider using one of these companies, please read the following article from Stephen Otto at debtlawnetwork.com:

Debt Counseling and Debt Consolidation Scams on the Rise

by:  Stephen Otto, Pittsburg Consumer Attorney

As the global economy retracts, many Americans are struggling to manage the mounds of household debt accumulated earlier in the decade, during a flourishing expansion when it didn’t seem quite so imposing.  Those struggling with debt are the perfect target for a new growth industry — companies that claim they can magically “eliminate” or “reduce” debt loads.

These companies use any number of labels to describe their business and catch the attention of desperate consumers:   debt consolidation; debt elimination; debt counseling; debt education.   They will demand princely sums, usually representing the last few thousand dollars saved by their desperate customers, and in exchange for their fee, promise to provide a complete and final solution to their debt problems.  Some even claim to be able to “transform debt into wealth.”

There is a typical “modus operandi” followed by these scammers.  Typically, the customer receives worksheets which require them to list all of their debts.  The scammer will then provide an “analysis” of the debt, which is usually nothing more than a sum of the consumer’s total debt.  The scammer will claim to be able to “negotiate”  a reduction of up to 70% of the actual total, and the customer will be encouraged to continue paying the scammer substantial fees until the program is “completed”.

On December 5, 2008, USA Today ran an excellent article about this trend, entitled “Be Careful of Debt Counselors: Some Can Make Matters Worse”.  The article points out another typical misrepresentation of these scammers: they will tell their customers that participation in their program will prevent their debts from being charged off.  This is a blatant lie, but it works well for debt counselors seeking to extract money from hurting consumers.

Another common bit of advice by debt counselors documented by Kevin McCoy of the USA Today is that the counselors will advise their customers to stop paying their debts while they participate in the program.  The customer will be lead to believe that the program will somehow prevent creditors from continuing in their efforts to legally collect the debts owed.  This is yet another blatant lie.

It should be pointed out that legitimate debt counselors do exist.  However, you will almost never see their advertisements on television or hear about them on the radio.  The legitimate companies do not aggressively market their services.  The United States Trustee maintains a list of legitimate counselors.