Consumer complaints about debt-relief providers have doubled since 2009. But by the time you complain, it's usually too late. Fear not. Here are five red flags that could mean you're being fleeced by your debt-relief provider - before the money goes missing from your pocket.

TUTORIAL: Credit and Debt Management

At first glance, seeing the cavalry charging to your aid after sinking into a serious debt disaster might well be a relief to consumers. Debt-relief companies are one of the least-regulated industries in the U.S., and there is no shortage of charlatans, fraudsters and scam artists waiting to separate you from your money. While the U.S. Federal Trade Commission does track down some fraudulent debt-relief companies – especially bogus foreclosure relief firms – individual states handle the bulk of the law enforcement responsibilities linked to debt-relief scams.

In Massachusetts, for example, The Office of Consumer Affairs reported over 3,000 consumer contacts over potential debt-relief fraudsters, and the state reported six out of 13 foreclosure-relief firms demanded up-front payments despite a law against such payments in the Bay State.

State Not Happy
The state isn't happy about the issue. "By charging up-front fees with no guarantee of success, these companies can further harm a consumer's situation instead of improve it," said Barbara Anthony, Massachusetts' undersecretary of the Office of Consumer Affairs and Business Regulation.

The FTC does have some practical advice on keeping bogus debt-relief outfits at arm's length, noting that a consumer's best defense is heightened awareness and a commitment to diligence against such scam artists. (For more, read What's Your Debt Really Costing You?)

Here's an insider's look at some of the best debt-relief tips from the Federal Trade Commission:

Watch out for Lofty "Promises"
The FTC advises consumers to run, not walk, away from debt-relief firms that promise consumer debts can be "paid off for pennies on the dollar." Despite such promises, there is no certainty that any creditor will accept any partial payment – and anyone who guarantees they will is steering you down the wrong road.

Watch for "Multiple" Payments
This one is a favorite of debt repair fraudsters, the FTC says. Any firm that bills you twice or more - for a monthly service fee and for a percentage of any money you saved via the debt repair firm's efforts – is ripping you off. According to the FTC, debt-relief services should be itemized, and delivered in one bill. No separate fee should be added for a percentage of any money you may save from reduced debt payments. Your best bet? Read the contract before you sign on the dotted line.

Vet Your Debt-Repair Firm
By and large, the best way to find a reputable debt-relief provider is through a rigorous vetting process. For example, the National Foundation for Credit Counseling can steer you to a debt-relief firm that's already been given the council's stamp of approval. Find an approved debt-counseling agency that can steer you well clear of firms that try to reach you via email, direct mail or via telephone. These "mass advertising" campaigns are a favorite tactic of fraud artists. A good tip: check any agency against the NFCC's list. If they're on it, fine. If not, keep looking. (To learn more read How To Find A Credit Counselor.)

Stay Away From Firms Requesting an "Upfront" Payment
Like Massachusetts, all states have laws against debt relief companies demanding an upfront payment for services provided. If a firm asks you for such a payment, know that it's illegal, and walk away. You can do your fellow consumers a favor by reporting the company to your state's attorney general's office.

Watch for the "Bait and Switch"
Fraudulent debt-repair agencies will try to lure you in with not only guarantees of success, but with some eye-opening, low-service rates. Don't be fooled. If a debt-repair firm advertises bargain basement rates (like $100 or under), chances are it's a sucker's bet. The ruse is to lure you in, get you signed up, then start throwing exorbitant fees and charges at you, or try to get you to buy more pricey services.

The Bottom Line
Defending yourself against debt-relief scams is like anything else in life. The more effort you put into it, the better off you'll be. If that effort is lagging, your huge debt load may not be your only big financial problem. (If you want to avoid these issues, you should get in a habit and Check Your Credit Report.)

Related Articles
  1. Credit & Loans

    Can Corporate Credit Cards Affect Your Credit?

    Corporate cards have a hidden downside. If the company fails to pay its bills, you could be liable for the amount and end up with a damaged credit rating.
  2. Home & Auto

    4 Areas to Consider Roofing Material Types

    Roofing your home is very important, that’s why you should choose a roof specifically designed to handle your area’s climate.
  3. Credit & Loans

    Your Credit Score: More Important Than You Know

    Credit scores affect key aspects of your personal and professional life. Knowing your score and managing your credit input can make a big difference.
  4. Credit & Loans

    Fixing Your Credit Score: A Do It Yourself Guide

    Following these five steps can go a long way toward repairing a low score.
  5. Investing Basics

    Should You Increase Your Credit Card Limit?

    What if you took out a new credit card and the issuing company started you off with a fairly low credit limit that hasn't been raised after the first year. Should you ask for an increase? The ...
  6. Credit & Loans

    How To Boost Your Credit Score To Save Thousands

    One of the first steps you should follow before buying a home is to boost your credit score. And how do you do that? Here, we tell you how.
  7. Budgeting

    The 5 Most Expensive States for Child Care

    To get a better sense of how child care costs can fluctuate, here's a look at the costs of child care across the country.
  8. Home & Auto

    Looking To Invest In Home Improvements?

    Some home improvement projects could cost you more to complete than they’ll pay out in equity. So, here we show you the worst projects to avoid.
  9. Credit & Loans

    Is My Credit Score Good Enough for a Mortgage?

    Your score is critical in determining not only whether you'll secure a loan for a home, but also what interest rate you will be offered.
  10. Credit & Loans

    Getting Your Credit Score from a Bank

    That all-important, once-secret number is now easy to obtain from financial institutions and credit card companies.
RELATED TERMS
  1. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability ...
  2. Jamming

    A scam perpetrated by bogus credit repair firms that involves ...
  3. Credit Card Dump

    The unauthorized copying of all the information contained in ...
  4. Furnisher

    A company that provides information about a consumer, including ...
  5. PIN Cashing

    A type of fraud in which a stolen credit card or debit card is ...
  6. Carding Forum

    A website dedicated to the sharing of stolen credit card numbers. ...
RELATED FAQS
  1. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  2. What is the range of deductibles offered with various health insurance plans?

    A wide range of possible deductibles are available with health insurance plans, starting as low as a few hundred dollars ... Read Full Answer >>
  3. How do I know how much of my income should be discretionary?

    While there is no hard rule for how much of a person's income should be discretionary, Inc. magazine points out that it would ... Read Full Answer >>
  4. What proportion of my income should I put into my demand deposit account?

    Generally speaking, aim to keep between two months and six months worth of your fixed expenses in your demand deposit accounts. ... Read Full Answer >>
  5. How should a whistleblower report unlawful or unethical behavior?

    Whistleblowing takes many forms. A whistleblower could expose government corruption, expose unethical business behavior or ... Read Full Answer >>
  6. How do insurance companies use a whistleblower?

    Fraudulent claims are among the most prevalent and serious business risks that insurance companies face. Many consumers have ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!