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How to Identify Debt Settlement Red Flags
Overcoming sizable debt is never easy. However, countless debt settlement companies make big promises to struggling individuals. It’s rare that their “Easy as 1-2-3” debt solutions lead to genuine relief.
There is no cookie-cutter way to deal with debt correctly. Some debt settlement companies are legitimate, but many use deceptive practices or charge exorbitant fees. Worse yet, some debt settlement offers are complete scams that prey on vulnerable people looking for a way out of untenable situations.
If you’re in substantial debt, you probably receive daily offers and advertisements from companies eager to help. They boast about getting results without bankruptcy, a preapproved debt consolidation loan, or enrollment in obscure government debt. Before you enter a debt settlement plan or engage in one of these services, learn about possible red flags that indicate a debt settlement company may not have your best interests at heart.
Our Ohio consumer law attorneys discuss identifying debt settlement red flags and offer tips on finding a sound solution.
What Does a Debt Settlement Company Do, Anyway?
Debt settlement companies target individuals struggling with large amounts of unsecured debt. That could include credit card debt or outstanding loans. These largely for-profit organizations offer to negotiate with your creditors to reduce your overall debt burden. They might try lowering the balance, waiving late fees, or reducing interest rates, in exchange for a modest fee.
Debt settlement companies accomplish this via:
- A Financial Assessment — The company should evaluate your financial situation. They’ll look at your income, expenses, and outstanding debts. This gauges your ability to pay and whether debt settlement is the right solution for you.
- Enroll You into a Plan — If debt settlement is deemed appropriate for your situation, you will enroll in the company’s program. The company may sometimes advise you to stop making payments and instead start depositing money into a separate, dedicated account managed by the debt settlement company or a third-party financial institution.
- Negotiate with Your Creditors — Once you save enough money in the dedicated account, the debt settlement company will begin negotiations with your creditors. They will attempt to convince your creditors to accept a reduced lump sum payment to satisfy your debt. This amount is often less than the total you owe. The negotiation process varies. It could take months or even years, depending on the complexity of your debt and how open your creditors are to negotiations.
- Settlement & Payment — If the debt settlement company successfully negotiates an arrangement with your creditors, you will use the funds in the dedicated account to pay the agreed-upon settlement amount.
- Collect Their Fee — Debt settlement companies typically charge fees for their services. These fees can be based on a percentage of the total debt enrolled in the program or a portion of the debt reduced through the settlement. In some cases, companies may charge a flat fee or a combination of fees.
Please note that debt settlement is not always the best option for everyone. It can hurt your credit score. Missed payments and settled debts are reported to credit bureaus. Additionally, creditors might not agree to the proposed terms. Other debt relief options, such as debt management, bankruptcy, or other legal actions, may be more appropriate depending on your financial situation.
The Debt Settlement Red Flags to Watch For
If you’re struggling with debt, your mailbox, social media feed, and inbox are probably flooded with debt-free ads and various assistance offers. But these debt settlement plans and consolidations are not created equal.
Some debt settlement offers are legit and may present a viable way to deal with certain types of debt, while many others are scams or simply ineffective for your situation. Here are some common debt settlement red flags to keep in mind:
Promises That Seem Too Good to Be True
Approach debt settlement companies that guarantee they can eliminate your debt or significantly reduce your interest rates with caution. While some creditors may be willing to negotiate, there’s no guarantee that they will agree to the terms proposed by the debt settlement company. If a company promises a specific outcome without assessing your unique financial situation, that’s a red flag.
Here’s an Example
Let’s say you receive a direct mailer from a debt settlement company. It claims its services can reduce your debt by 70% with little to no paperwork. This sounds like the easy and one-time answer to your debt problems that you’ve been waiting for, right?
Not so fast. It should raise a big red flag because it’s doubtful that a debt settlement company can guarantee such a specific outcome before they’ve seen your finances or spoken with your creditors. This promise may indicate that the company is more interested in making a sale than providing a realistic debt solution. Before offering a reduction plan, legitimate debt companies will assess your unique financial position, including income, expenses, and outstanding debts.
High Upfront Fees
Some debt settlement companies charge substantial upfront fees before negotiating with your creditors. These fees range from a few hundred dollars to a percentage of your total debt. It’s important to remember that paying an upfront cost does not guarantee success. A more transparent approach would be to charge a fee only after successfully negotiating a settlement. Watch out for companies that demand large upfront payments.
Lack of Transparency
Reputable debt settlement organizations should be open about their fees, potential risks, and their track record of success. If a company is reluctant to provide this information, it may be trying to hide something. A lack of transparency is a red flag. It can make it difficult to decide whether their services are right for you.
Aggressive Sales Tactics
High-pressure sales tactics are a standard red flag among disreputable debt settlement companies. They might be pestering you with relentless phone calls or messages. A legitimate company should be willing to give you time to decide and provide you with the necessary information to evaluate their services. If a company pushes you to make a quick decision, it may be more concerned with its bottom line than your financial well-being.
No Consumer Credit Counseling
Credible debt settlement plans should provide for or at least recommend credit counseling to help you understand your financial situation and create a plan to manage your debt long-term. If a company does not offer any form of counseling, it may not have your best interests in mind.
A Lot of Complaints & Negative Reviews
It’s essential to research the reputation of a debt settlement company before working with them. Check the Better Business Bureau (BBB) website and other online review platforms for complaints and negative reviews. Even though no company is perfect, a pattern of unresolved complaints or many negative reviews may show a lack of professionalism and commitment to customer satisfaction.
No Industry Affiliations
Reputable debt settlement companies often belong to industry associations. They could be members of the American Fair Credit Council (AFCC) or the International Association of Professional Debt Arbitrators (IAPDA). These associations have standards and codes of conduct their members must follow. If a debt settlement company is not a member of industry associations, it may not adhere to best practices and ethical standards.
Posing as a Law Firm
Unfortunately, one of the biggest red flags when evaluating a debt settlement option is one of the hardest to spot. People should be aware of unscrupulous debt services organizations that falsely present themselves as lawyers capable of representing you in the debt settlement process.
Often, a debt company will partner with an out-of-state law firm or create a fake law firm to appear more credible to potential clients. They might try to give the impression that they have more legal authority in negotiating with creditors. Don’t be misled.
These fraudulent debt settlement law firms only exist to offer unrealistic expectations. When credible attorneys represent you, they have a fiduciary responsibility to your interests. That’s not the case with a fake firm. These firms have no added authority to compel creditors to participate and offer no additional protection against a negative effect on your credit.
Perhaps, most importantly, they are likely not licensed to practice in your state. They could not represent you in court if a creditor decides to take legal action against you. The latter is crucial because if a creditor does not want to participate in your debt settlement plan, they may file a debtor lawsuit when you stop making payments in anticipation of a settlement.
Tips to Find a Real Debt Solution
To avoid falling victim to a disreputable debt settlement company, it’s best to work with an experienced debt attorney licensed to practice in your own state. While debt settlement is a viable relief option for some, many are better served by an alternative. Without an independent review of your unique financial condition, you could be locked into a plan that does little to help or causes even more harm.
Here are a few things to consider when considering debt settlement:
- Do Some Research — Investigate the company’s reputation and online reviews. Look for unresolved complaints or a pattern of negative reviews.
- Compare Fees & Services — Get quotes from multiple debt settlement companies. Compare their fees, services, and success rates. Be cautious of companies charging excessive fees or offering results that seem too good.
- Evaluate Communication — How a company communicates with you can say a lot about its professionalism and commitment to customer satisfaction. Look for companies that are responsive to your questions, provide clear and transparent info, and don’t use aggressive sales tactics.
- Verify the Company’s Record — Ask the debt settlement company for statistics on their success rates, such as the average amount of debt reduction and the percentage of clients who complete their program. Keep in mind that past performance is not a guarantee of future results. Still, a solid track record can provide reassurance that the company has experience negotiating favorable settlements.
- Carefully Read the Terms — Before signing any agreement, read the fine print, and make sure you understand the terms and conditions. Be wary of companies that pressure you to sign without giving you time to review the contract. If you have any concerns or questions, consult with a legal professional.
- Seek Professional Advice — Before committing to a debt settlement, consider working with a nonprofit credit counseling agency or debt relief attorney. Both can evaluate your unique financial situation and explore all your debt relief options, including debt settlement, debt management plans, and bankruptcy. An attorney offers the added security of being able to put most debt plans into action and can represent you in a bankruptcy or debtor action.
Contact Our Ohio Consumer Law Attorneys for Help
Struggling with insurmountable debt and relentless collection calls takes a serious toll, and debt settlement companies know it. They realize you are looking for a quick and easy way to get out of debt, and many want to take advantage.
That’s why you must be aware of potential debt relief scams and the signs of a dodgy debt settlement operation. By identifying the common debt settlement red flags and conducting your own research, you can make informed decisions and better determine the best option for lasting debt relief.
Unlike other debt help companies, Luftman, Heck & Associates is a consumer debt law firm licensed in Ohio and capable of protecting you in ways other debt settlement companies can’t. We review your finances and how to free you from eternal debt. Then, we find the best tool to address your situation.