Debt Settlement Scams
Deceptive and fraudulent claims are commonplace in a rogue industry dominated by ineffective companies that promote debt settlement scams. After years of investigations and public feedback, the Federal Trade Commission acted to ban the widespread advance fee model favored by debt settlement companies. That ban goes into effect October 27, 2010.
Debt settlement companies claim to be able to slash your credit card debt by 60% or more. What they don't tell you is that after paying their fees, additional interest and income taxes on forgiven debt, you will have likely spent more than you initially owed when you first hired them. That dreadful scenario is actually a best-case scenario, since most debtors face judgments and resulting garnishments, liens and bank account levies well before they ever complete a debt settlement plan.
Our experience has been that most people that sign up for a debt settlement plan realize they made a mistake. However, at that point they have already wasted thousands of dollars in fees only to find that they have settled nothing and are facing escalated collections and legal actions.
A few wise consumers at least consider the pros and cons of debt settlement prior to agreeing to one of these inadvisable plans. Once they see how ineffective debt settlement companies really are, they think twice before signing up for such a scam.
What the FTC Ruling Means
The FTC ruling specifically is based on its Telemarketing Sales Rule, which prohibits false and misleading claims by companies communicating with customers by telephone. If a for-profit debt settlement company sells debt settlement services by phone, they are now prohibited from charging an advance fee.
These initial fees typically run from 8-12% of the initial debt balances. Since most debt settlement companies historically have required at least $10,000 in debt balances, it is rare that any client will have paid less than $1,000 in upfront fees which are due before the company will even lift a finger.
Business as usual for debt settlement companies hawking these plans is no longer possible. Instead, major debt settlement trade associations have been scrambling to find a work around that will allow them to continue promoting debt settlement scams.
One such idea proposed at an industry conference was for debt settlement companies to move offshore. Many feel that they could continue to scam clients despite the ban in similar ways that online gambling sites and illegal prescription drug sellers have continued to flourish.
As a consumer, you should remain skeptical of any company that claims that they can settle your debt for you. Beware of debt settlement scams that promise results, since there is no company that is capable of that.
Remember also that the FTC ruling does not expressly prohibit debt settlement companies from operating or from charging high fees. It does prohibit upfront fees prior to services being performed.
In the end, your best bets usually include a self-guided approach, a debt management program through a credit counseling organization, settling your own defaulted debt or a personal bankruptcy filing. Any of these approaches is always cheaper and more effective than the debt settlement scams that you see advertised so heavily.