Is “Debt Relief” a Scam?

Is Debt Relief a Scam?

Debt relief isn't a scam, which is one reason scammers can get away with tricking their victims. It also isn't one thing. Debt relief can describe any tactic or approach that reduces your debt balance, interest rate or monthly payment. Some legitimate examples include refinancing debt with a lower-rate loan, using a debt consolidation loan to lower your overall monthly payment or filing for bankruptcy.

The debt relief scams generally come in the form of promises to greatly reduce how much you owe. Scammers might pretend to represent a government agency or a creditor and focus on a specific type of debt, such as credit card, mortgage, student loan or tax debt. They also tend to target specific populations, including seniors and veterans. The scam involves charging consumers an upfront fee for the promised services and then doing little or nothing in exchange.

These types of scams are prevalent enough that the Federal Trade Commission (FTC) regularly issues press releases about scammers it has shut down. The FTC also maintains a list of people and entities it has banned from offering debt relief services.

Learn more: How to Consolidate Debt

What to Know Before You Enroll in Debt Relief

There are two types of debt relief services that you might enroll in if you're struggling with payments: debt management plans and debt settlement programs.

Enrolling in a Debt Management Plan

The first is a debt management plan (DMP). Nonprofit credit counseling organizations offer and manage DMPs for people struggling with unsecured debt, such as credit card debt. Once you're enrolled, the counselors negotiate with your credit card companies to lower interest rates, bring accounts current and forgive fees.

You send a monthly payment to the counselor, and the counselor divvies up the amount and forwards payments to each card company. There's a monthly fee for the service, but waivers may be available, and it's usually more than offset by the interest savings. One downside is that you can't use or open credit cards during this period.

A DMP might lower your monthly bills, save you money and pay off the included debts in three to five years. You can find legitimate options by looking for a local or national provider that's part of the National Foundation for Credit Counseling or Financial Counseling Association of America.

Learn more: How Much Can a Debt Management Plan Save You?

Enrolling in a Debt Settlement Plan

The second option is a debt settlement plan. Debt settlement companies, sometimes called debt relief companies, are often for-profit organizations. They similarly offer to negotiate with your creditors, but the aim is to settle the debt for less than what you owe rather than get you on an affordable payment plan.

With a debt settlement plan, you'll stop making your monthly payments and set money aside in an escrow account instead. The idea is that your creditors will accept a settlement, and you'll have enough set aside, after you've done this for several years. However, you'll continue to accrue fees and interest during this period.

The debt settlement company might charge 15% to 25% of the debt you "enroll" in the program. In the end, there's no guarantee that the creditors will agree to a settlement. And even if they do, the forgiven debt may be treated as ordinary income for tax purposes. Debt settlement can also severely hurt your credit scores, since your creditors will likely report all your missed payments to the credit bureaus.

Tip: You can negotiate with your creditors on your own for free. While they don't have to accept requests for reduced payments or debt settlement, it never hurts to ask and working to negotiate with them on your own can save you money.

Learn more: What's the Difference Between Debt Settlement and Debt Management Programs?

Signs of Debt Relief Scams

Legitimate debt relief companies might be helpful, even if they are expensive. But scammers prey on people who are in a hard place and steal their money. Here are some signs you're dealing with a scammer:

• Demanding upfront payment: Legitimate debt relief companies collect fees after securing settlement agreements with creditors or providing other services. Upfront payments, which scammers may characterize as "voluntary donations" or fees, are a red flag.
• Promising results: Nothing is guaranteed in a debt settlement process, so be wary of someone who promises you a favorable outcome.
• Claiming special methods or access: A scammer might claim to represent government agencies or your creditors and say they have access to special programs or tricks.
• Unsolicited outreach: Fraudulent companies may send you emails, direct messages or texts, or call you and attempt to get you to enroll in the program.
• Pushing for a quick enrollment: Debt relief companies often screen prospects and won't accept you unless you meet certain conditions, like having at least $10,000 in past-due debt. Scammers don't care because they're stealing money from you rather than making money on fees.
• Minimizing the potential consequences: Even working with a legitimate debt settlement company can hurt your credit and leave you deeper in debt. Your creditors might even decide to sue you rather than agree to a settlement.

Learn more: Risks of Debt Settlement

Is Debt Relief a Good Idea?

Exploring ways to improve your financial situation is always a good idea, but working with a debt settlement or "debt relief" company might not be the best option. Avoid companies when there's a sign of a scam or if you're feeling pressured to enroll.

Debt Relief Might Be Worth Considering If:

• You're juggling paying for basic necessities and making minimum debt payments.
• You're behind on your bills.
• You don't qualify for or can't afford consolidation or counseling.
• You're considering bankruptcy.

Debt Relief Probably Isn't a Good Idea If:

• You have good credit and a steady income.
• You could afford the payments if you kept a stricter budget.
• You're primarily struggling with secured debt, such as an auto loan or mortgage.

Read more: How to Get Out of Debt

Alternatives to Debt Relief Companies

Rather than working with a company, you might be able to take matters into your own hands and try to negotiate with your creditors. You can also look into other alternatives to debt settlement or a DMP, such as:

• Debt consolidation: If you have good credit and a steady income, you could look into debt consolidation. Using a relatively low-interest personal loan to pay off other debts can decrease your monthly payments and the amount of interest you pay. You can also consolidate debt with a balance transfer credit card that offers a 0% introductory annual percentage rate (APR).
• Servicemembers' Civil Relief Act: If you or a family member is an active-duty service member, the Servicemembers' Civil Relief Act may give you the right to request a 6% interest rate on your debts. However, you'll need to send each creditor a written notice requesting the rate and verifying your eligibility.
• Bankruptcy: Filing for bankruptcy may be a good alternative, particularly if you don't think any other options will be realistic. It can cancel many, but generally not all, of your debts. However, filing for bankruptcy can also have major negative impacts on your credit, so consider any consequences carefully.

Frequently Asked Questions

The Bottom Line

Some fraudsters and scammers prey on people who are in a tough financial position. It can be tempting to sign up for a program or believe someone who says they have a trick to help you get out of debt, but that likely isn't a real path forward. If you're looking for debt relief, try options that you can do on your own or contact reputable organizations directly.