Debt relief and credit repair scams often target consumers facing credit or financial problems. It makes sense, given that the U.S. household debt totaled $17.5 trillion in the last quarter of 2023, according to the data from the Federal Reserve Bank of New York. Because debt can be a sensitive subject, it’s easy to get confused about the terms of debt relief, and even easier to be duped by scammers. Learn the basics, the red flags to avoid, and how to choose a lawful and reputable debt management company.
Does your list of New Year resolutions include tackling your debt?
If so, you’re probably not alone. You're also probably not the only one who desperately wants to believe the promises debt relief scammers make.
According to the Federal Trade Commission (FTC), consumers with credit or financial problems are often targeted by debt relief and credit repair scams.
Our identity specialists recommend avoiding anything that seems too good to be true. Keeping this in mind can help keep you safe from debt relief scams.
Debt is on the rise
Hundreds of millions of Americans have fallen further and further into debt over the past few years, resulting in plummeting credit scores.
In November 2023, the Federal Reserve Bank of New York released its third-quarter report on household debt and credit, and the stats painted an ugly picture:
Household debt balances increased by $228 billion in the third quarter of 2023, a 1.3% rise from the previous quarter. The total household debt in the U.S. rose to $17.3 trillion.
Collectively, cash-strapped credit card holders owed $1.08 trillion. This category of debt showed a record $154 billion increase from 2022, the largest year-to-year leap since 1999 when the New York Fed began recording such information.
Delinquency rates, meaning debt that’s past due, also increased with 3% of outstanding debt in some stage of delinquency by the end of the quarter.
Understanding debt in America
For everyday consumers, living without debt has become increasingly difficult. Recent data shows that debt affects people of all ages and genders, and there are many reasons why debt might accumulate.
In late 2023, the Federal Reserve Bank of New York reported that millennials had more delinquent credit card payments than any other age group.
A November 2023 WalletHub survey revealed that 25 percent of people surveyed were still paying off holiday debt from 2022. It further noted that 20 percent of them applied for new credit cards to cover the pending cost of gift-giving.
Is there legitimate debt relief?
Given all this, it's no surprise that debt relief is on everyone's mind.
“Debt relief,” “debt settlement,” and “debt negotiations” simply describe ways of managing what you owe to a certain entity.
You can pair up with a reputable debt relief group to safely — and perhaps economically — pay off your existing debt.
In the best case, it works like this: A company takes you on as their client, reviews your delinquent debts, and proposes a personalized plan to pay those off. The plan might entail tackling a single debt or several separate debts at the same time.
In either case, the company negotiates with the original creditors for a lesser balance owed and/or a lower percentage rate (annual percentage rate or APR) charged for that balance. As the client, you then reimburse the debt relief company, and that company pays the creditors.
You may be wondering, “Why would any creditor agree to renegotiate terms that might shortchange their collections?”
The credit report agency Experian explains that some creditors will renegotiate settlements because they don’t want to gamble on all or nothing. “Nothing” happens when the debtor declares bankruptcy and the credit company does not get a penny.
In other words, creditors sometimes think it’s best to get some repayment rather than none.
However, even if you are working with a reputable debt settlement company, creditors are under no obligation to accept an offer and reduce your debt.
Cons of working with a debt relief company
Using (even legitimate) debt repair services can have some potential downsides.
Like with any loan, if you’re working with a debt relief company and miss payments or make late payments, the company may add financial penalties to its regular service fees.
Plus, if a credit relief representative advises you not to pay your balances while they negotiate with creditors, you could still default on your debts. You may be penalized with delinquency fees and terms, which can harm your credit score and hinder loan opportunities in the future.
Employment opportunities and rental agencies requiring sound credit scores might also become closed to you.
Lastly, the initial lure of saving a lot by working with a debt relief professional may not always pan out when you run the numbers. The fees, terms, and APRs of debt relief agencies may prove to be more convenient than money saving.
What about debt consolidation?
Another form of legitimate debt refinancing is debt consolidation which involves a loan intended to repay your outstanding credit balances.
After paying off your outstanding debt with the loaned money, you (the loan recipient) then repay your lender according to their terms, timeline, fees, and APR.
The pros of debt consolidation are:
The relief that comes from owing one creditor rather than many.
An APR that may be lower than what you pay your creditors now.
The designated payoff date puts a finish line to your time in the red.
A simplified path to rebuilding your credit standing.
How to know when “debt relief” is actually a scam
When a scammer calls and starts spewing out financial terms, or when an email or letter loaded with debt relief talk arrives, it can be difficult to tell if these offers are trustworthy.
While there are some legitimate debt relief companies, debt relief scams are, unfortunately, common. If you fall for a scammer or sham debt relief agency, you could lose money, have your personal information compromised, and see your credit score plummet.
Emotions run high when it comes to finances, especially when it comes to student loans, mortgage debt, and medical or credit card debt. Try not to let fear, panic, and/or desperation cloud your thinking when it comes to solutions.
To combat this, the Better Business Bureau (BBB) recommends watching out for the following five telltale signs of a debt relief scam:
Upfront fees: Beware of debt relief agencies that demand fees upfront before any contracts have been signed and before work on your behalf commences.
Requests for your personal identifiable information (PII): Disengage with any representative who asks for your sensitive information right away, like the last four digits of your Social Security number or bank account details (especially if they're asking before you’ve determined the company’s legitimacy).
Quick fixes: Digging yourself out of debt usually takes much longer than it does to rack it up. This is where “too good to be true” comes into play. If someone promises a quick fix, run.
Relief packages that overreach: If a company or individual guarantees that your debt can be repaid for only a small amount, consider that a stop sign.
Counterproductive fee structures: How much of your payment is going to the debt relief agency and how much is going to pay off the amount of money you owe? If the former outweighs the latter, there might be a scam at work.
How to find a reputable debt relief agency
The BBB maintains a national list of debt relief agencies, and their ratings range from A+ to F. Visit BBB.org and search “debt relief services” or “debt consolidation services” for a state-by-state directory of options.
Beyond the BBB’s list, several media outlets keep lists of their own including Forbes. They judge each debt relief group based on fees charged, BBB score, Trustpilot score, age of the business, and accreditation with the American Association for Debt Resolution (another organization that curates a list of credible, accredited debt relief companies).
If you're still unsure, give us a call and we can help you figure out if something is a scam.
With Allstate Identity Protection by your side, you have access to a team of experts who care about your financial well-being.
