Debt settlement can be risky

As the personal debt of Americans has skyrocketed in recent years, many have clawed desperately for a way out from under the pile of debt. In some cases, desperation has led to victimization from companies that promise to be able to “settle” debts (in other words, reaching an agreement with your creditors less than you actually owe).

The federal Consumer Financial Protection Bureau (CFPB) announced this week that they had fined a New Jersey-based firm $69,075 for taking money up-front from consumers to settle their debts; such fees are illegal. In 2013, the CFPB charged Premier Consulting Group and an associated law office with violating the Telemarketing Sales Rule and other laws.

“These companies took advantage of consumers in financial distress, charging tens of thousands of dollars for services they failed to deliver,” said CFPB Director Richard Cordray. “Charging upfront fees for debt-settlement services is against the law, and today’s action is another reminder that these illegal practices will not be tolerated.”

According to a release from the CFPB last week, the fees and “the companies’ failures to provide effective services” only worsened the debt load of consumers.

Last week’s announcement was part of a larger case involving CFPB investigations of debt settlement firms. In November, the owner of a company called Mission Settlement was sentenced to nine years in prison after pleading guilty to conspiracy charges of mail and wire fraud.

According to CFPB, Premier’s civil penalty of $69,075 “represents the amount of advance fees the companies took from consumers who did not have any debt settled.” It was not clear when, or if, the funds would be returned to consumers.

So, how do you avoid becoming a victim to a company offering to settle your debt? According to Bankrate.com and other sources, there are a few things you should know before going down this road:

  1. Consider other options, such as debt management. Contact a credit counseling agency, but be sure to investigate whether they are truly nonprofit organizations. Some companies claiming to offer “credit counseling” are actually just looking to make a buck. If anything, they will encourage you to just reorganize your debts. This is not a solution, and can only make the problem worse. Look for community-based organizations instead, which will work with you to develop a realistic plan for getting back on your feet.
  2. Be proactive. Don’t wait until you are drowning to seek help. Many creditors will work with you to establish acceptable payment plans.
  3. Check out claims carefully. If a company promises to settle your debts without first checking to see what you actually owe, this is a big red flag. In fact, your creditors are not bound by law to offer any settlement options, but they may have programs in place. Your best bet is to contact the creditor directly.
  4. Don’t agree to pay any up-front fees.
  5. Know the consequences. If you settle your debts, and the amount forgiven equals more than $600, the IRS considers it taxable. Settlement can also negatively affect your credit report.
  6. Be transparent. When working with a creditor, they may require extra steps to make sure you are truly in financial trouble, and not just looking for a better rate or deal. So, be honest and open.
  7. Be realistic. Don’t agree to pay more than you can afford; that will only make the problem worse.
  8. Check your credit report. You may not like what you see, but you will know where you stand. This will also help you make sure the creditors are reporting the reduction in your total debt.

For more tips on debt settlement, visit http://www.consumer.ftc.gov/articles/0145-settling-credit-card-debt.

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