The Better Business Bureau (BBB) recently released a report showing that debt settlement (also known as debt relief) scams are rising. As of June, 1,794 consumers claimed they were defrauded by debt relief and credit card scams, with the organization noting they were tracking to receive 3,588 complaints by the end of the year. Since 2020, the BBB has logged almost 12,000 complaints of a similar nature.
This makes sense, given the record-high credit card debt in the United States. According to LendingTree, we currently have $1 trillion in total national credit card debt for the first time ever. While asking for help to pay off your debt can benefit you, your wallet, and your credit score, knowing what to look out for can help you avoid getting scammed.
Debt Settlement Explained
Typically, debt settlement (or debt relief) companies are for-profits that offer to negotiate with your lenders to reduce the amount you owe. But even with legitimate companies, the negatives may outweigh any potential benefit.
Debt relief companies often use tactics that may put you in more debt than you’re already in.
Negatives include:
- Charging high fees, sometimes 15%–25% of your debt.
- Debt settlement companies will often tell you to stop paying on your credit cards to better your chances for debt settlement. This will ultimately impact your credit score.
- If you stop paying on your credit cards, you’ll get hit with late fees and other penalties, increasing the debt you already owe.
- Forgiven debt is taxable, so you may owe the IRS thousands of dollars.
- Your lenders may not agree to settle.
Debt Settlement Scams
According to the BBB, common consumer complaints have included high fees, customer service issues, unexpected charges, and paying thousands for little-to-no benefit. The BBB also reported that companies who prey on consumers usually follow a pattern of reaching out to people and advertising their ability to help reduce their debt, but once they’re paid, they disappear or offer fraudulent services.
Credit Consumer Credit Counseling Can Help
Alternatively, credit counseling agencies are nonprofits that employ certified credit counselors to help you create a budget, goal plan, and provide educational materials to further your financial literacy. They can also enroll you in a debt management plan, where your counselor will work with your credit card companies to reduce your interest rate and consolidate your unsecured debt into one monthly payment.
To avoid scammers, the BBB advises never paying an upfront fee and avoiding people who offer “quick fixes.”