Working to Pay Down Debt? Avoid Debt Relief Scams and Bad "Services"

August 2016

Millions of Americans owe thousands of dollars on credit cards, student loans, medical bills and other unsecured loans or bills. Many are struggling every month to make minimum payments on what they owe. Even people who are managing their payments would love to pay less. Such circumstances make consumers with debt easy targets for debt relief and debt consolidation scams and schemes.

It’s important that you protect yourself from phony or ineffective debt relief or consolidation schemes that may cost you more money and ultimately increase your debt. These scams often open you up to identity theft, and generally dump you in financial "hot water." Here are some major red flags that we have identified from scammers to help you protect yourself.

1. They promise or "guarantee" to reduce interest rates or reduce the amount owed. This claim is often made in promotions on websites or in emails, over the phone, or snail mail. No company, including long-established, reputable credit counseling agencies or law firms, can guarantee that they can successfully negotiate with creditors to achieve a reduced interest rate on individual loans or to get the creditors to reduce the balance owed. Such "promises" and "guarantees" are red flags.

2. They ask for upfront fees. Asking that you pay up-front before the company provides services is illegal in most cases. Outfits demanding fees do not typically provide a contract spelling out exactly what they will do and the costs associated with the service. That is also illegal. To put it bluntly, scam outfits are just interested in stealing your personal information and your money.

Watch Out for These Red Flags

  • They promise or "guarantee" to reduce interest rates or reduce the amount owed.
  • They ask for upfront fees.
  • They imply or claim that their debt relief program has legal or government backing.
  • They offer a fee-based program to lower student loan payments.
  • They pressure you to sign up quickly for a “guaranteed” “low-rate” consolidation loan.

3. They imply or claim that their debt relief program has legal or government backing. Claims such as this will typically state things such as "you have a legal right to settle your accounts" or "Congress has passed recent legislation giving you the absolute right to settle your accounts." Such wording implies to most people that their debt will be reduced. These claims are misleading and meaningless.

4. They offer a fee-based program to lower student loan payments. As student loan debt has grown, the scams associated with them have multiplied. Companies are charging for programs that the federal student loan program offers for free at As the Department of Education advises, never pay for services and personal advice that offers for free. Federal programs that offer reduced monthly payments include flexible, income-based repayment plans. No programs other than offers federal loan reduction programs that can reduce the amount of money you owe. Such federal programs include reduction for public service or teaching programs and loan forgiveness programs.

5. They pressure you to sign up quickly for a "guaranteed" "low-rate" consolidation loan. A legitimate consolidation loan from a reputable lender may be a good option for some individuals. For example, a federal consolidation loan for federal student loans offers many individuals a good option to better manage student loan debt. Unfortunately, the media’s attention to student loan debt and borrower worry has brought out scammers. Many advertisements state that borrowers can take "advantage of a secret option to handle debt"—a debt consolidation loan. They imply that such a loan offers a way around the "demands" of credit card companies or student loan servicers. However, many are not offering a consolidation loan at all, rather a "debt management program" where they supposedly negotiate with your creditors to lower payments. In this case, the "debt relief" company requires that you pay one monthly payment to them so they can pay your creditors. In reality, they are keeping a large sum of that money for themselves. In some instances, companies are only interested in your payment and never actually pay any of your creditors. In other instances, the company could cost you much more money in fees.

If you are interested in a consolidation loan talk first to your credit union or bank about what programs they offer. Many offer a genuine consolidation loan (which may be an unsecured personal loan) that you use to directly pay off specified loans. For federal student loans, consider the direct federal consolidation loan. For private consolidation loans, compare loan offerings and terms from multiple, established lenders and choose the one that is best for you. There is also the option of using a home equity loan to pay off debt, but before signing up for this loan consider very carefully the dangers of putting your home at risk to pay off unsecured debt.

Getting More Help Managing Debt and Credit

If you are struggling to pay down debt and meet your other financial obligations, you may benefit from legitimate credit counseling from an established, nonprofit credit counseling agency. Ask your credit union or bank for a recommendation (many financial institutions have a relationship with a reputable service). Check out all recommended agencies and their track records with your local and state consumer affairs office or attorney general and with the Better Business Bureau. Never sign up for a program without a thorough review of what specific services they will provide and of what your obligations are; they should also give you a written contract that spells out those services and terms. Taking active steps to manage debt before you get in serious trouble is the smart thing to do.

For More Information

"Learn to Spot the Telltale Signs of Debt Relief Scams" by Michele Singletary, nationally syndicated personal finance columnist for Washington Post.

Coping with Debt from the FTC

StraightTalk Video: Worried About Debt? Beware the Quick Fix!

Remar’s Report: Considering Debt Settlement? Why That's Probably a Dangerous Idea

Remar’s Report: Have Student Loan Debt? Six Tips to Pay It Off Faster


FoolProof Fast Facts

Follow Corning CU: