Identifying Debt Relief Scams

Common Debt Relief Scams

1. Advance Fee Scams

Companies charge large upfront fees before providing any services, then disappear or provide no help.

Red flag: Requires payment before any debt is settled
Legal: Companies can only charge after settling debt

2. Debt Elimination Scams

Promise to legally eliminate debt using "secret loopholes" or claiming debt doesn't exist.

Claims: "Credit card debt is not legally enforceable"
Reality: No loopholes exist; debt is valid

3. Credit Repair Scams

Guarantee removal of accurate negative information or promise specific score increases.

Red flag: "We can remove bankruptcies, judgments, and liens"
Reality: Only inaccurate info can be removed

4. Fake Nonprofit Organizations

Claim nonprofit status to appear trustworthy while charging excessive fees.

Red flag: High fees despite nonprofit status
Check: Verify 501(c)(3) status with IRS

5. Debt Consolidation Loan Scams

Charge fees for loans that never materialize or have terrible terms.

Red flag: Guaranteed approval, upfront fees
Reality: Legitimate lenders don't guarantee approval

Major Red Flags

Upfront Fees

Charging before settling any debt is illegal under FTC rules.

Unrealistic Promises

"Settle debts for pennies on the dollar"
"Erase bad credit legally"
"Stop all creditor calls immediately"
"Guaranteed results"
"Secret legal loopholes"

Pressure Tactics

"Enroll now or lose this opportunity"
"Limited time offer"
Refusing to explain terms clearly
Pushing you to decide immediately

Tells You to Stop Communicating

Advising you to ignore creditors or stop payments immediately (without context).

No Written Contract

Legitimate companies provide detailed written agreements.

Can't Explain Services

Vague about what they actually do or how they'll help.

Specific Scam Tactics

File Segregation Scam

Tells you to apply for EIN and use it instead of SSN to create "new" credit identity.

Reality: This is identity fraud and illegal.

Phony Debt Validation

Claims they can validate debt out of existence using technical letters.

Reality: Debt validation is a consumer right, not a magic eraser.

Debt Consolidation That's Actually Settlement

Advertises as consolidation but actually stops payments to negotiate settlements.

Problem: Doesn't disclose credit damage from missed payments.

How to Verify Legitimacy

Check Licensing

Verify state licensing requirements
Check with state Attorney General
Look up BBB rating and complaints

Verify Nonprofit Status

Search IRS Tax Exempt Organization database
Check for NFCC or FCAA membership
Look for COA accreditation

Research Online

Google company name + "scam" or "complaints"
Check Consumer Financial Protection Bureau complaints
Look for lawsuits or regulatory actions
Read multiple review sources

Legitimate Alternatives

Nonprofit Credit Counseling

Members of NFCC or FCAA
Free initial consultation
Reasonable fees ($0-$75/month)
Certified counselors

Legitimate Debt Settlement

Licensed in your state
Clear fee structure (15-25% of enrolled debt)
Fees only charged after successful settlement
Honest about credit impact

DIY Options

Negotiate directly with creditors
Balance transfer credit cards
Debt consolidation loans from banks
Consult bankruptcy attorney

What to Do If Scammed

Immediate Actions

Stop all payments to the company
Document everything (contracts, payments, communications)
Contact your bank to stop payments
Resume payments to original creditors

Report the Scam

Federal Trade Commission (FTC)
Consumer Financial Protection Bureau (CFPB)
State Attorney General
Better Business Bureau
Local police (for fraud)

Seek Legal Help

Consult consumer protection attorney
May be able to recover fees
Document for potential class action

Questions to Ask Any Debt Relief Company

Are you licensed in my state?
What are all your fees and when are they charged?
How long will this program take?
What happens to my credit?
Can I see a written contract before enrolling?
What are the risks?
What happens if I can't make payments?
Can you provide references?
How do you get paid?
What happens if creditors don't cooperate?

Warning Signs Summary

✗ Upfront fees before services
✗ Guaranteed specific results
✗ Pressure to enroll immediately
✗ Claims of secret loopholes
✗ Tells you to stop all creditor contact
✗ No written contract
✗ Can't clearly explain services
✗ Not licensed in your state
✗ Refuses to answer questions
✗ Suspicious of your skepticism