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Ask Jean: Debunking Debt Settlement

iStock_000006670727XSmall“I get a lot of letters in the mail from companies that say they can cut my credit card debt in half. Are these companies legitimate? I feel like I’m drowning.” – Alicia, Georgia

For the most part, no. I’m sure you’ve heard a lot in the news recently about debt settlement scams that target those in dire financial situations. Unfortunately, many of these companies don’t deliver what they promise – your debt cut in half, an end the collection calls, and a fresh start. “The truth is, the process can take years to complete, your credit is going to take a big hit and the large upfront fees mean that you can end up drowning in even more debt,” says Alison Southwick, a spokesperson for the Better Business Bureau (BBB).

This is one of those times when it’s nearly always too good to be true. Fortunately, the government is aware of how much trouble these debt settlement companies can get you into – and in response, the Federal Trade Commission (FTC), which serves to protect consumers, passed the Telemarketer Sales Rule which regulates the ways in which “debt relief services” can contact you, and what they can promise. “Debt relief services” include debt settlement, debt negotiation, and credit counseling companies. Here are three key provisions of the rule.

It’s illegal to charge upfront fees. In the past, some companies charged the consumer right away for debt settlement services, and for someone strapped for cash to begin with, this creates an even greater hardship. The rule states that you can’t be charged an upfront fee – the company can only charge you a fee once they have actually renegotiated a debt.

They need to give you the details. Before you can sign up, these companies are required to give you the rundown on what they’re offering. That includes a timeframe in which you’ll see results, what it will cost you, what type of bank accounts (if any) they’ll use to help settle your debt, and the negative consequences that can result from settling your debts.

They can’t make false promises. I’ve said time and again that it’s unrealistic to expect your debts to be settled for virtually nothing – which is often what these firms advertise. The rule requires companies to accurately disclose how much you’ll save, how long it will take, how it will affect your credit, their success rating, and their non-profit vs. for-profit standing – among other things.

With these protections in place, you should be able to keep yourself out of trouble if you find yourself unable to make payments on your accounts. However, it’s important to still be a smart consumer, and do research before trusting someone else with your money. “Contact your creditor first,” says Southwick, “and seek help from a not-for-profit credit counselor.” Non-profit organizations might still charge you a fee, but it will be much, much less than what you’d be charged through a for-profit company. You can find one in your area by visiting the NFCC’s website. And if you’re still hitting a wall, you can consider debt settlement as a last resort. “Research the company with the BBB first,” advises Southwick. Check the business’ rating along the BBB’s A-F scale. “A company that predominantly makes their living through debt settlement will automatically have their letter grade docked significantly, because we believe the industry has ‘inherent problems,’” Southwick explains. “As a result, perhaps only one or two debt settlement companies in the US have a grade above a C.” The BBB only gives their accreditation to businesses with a B- or above – so look for their seal on the company’s website first. And if you find a company that’s violating any of the Telemarketer Sales Rule provisions? Make sure you file a report with the BBB. Not only will it substantiate your own personal claim, but it will help keep others like you out of trouble in the future.

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