Debt Settlement Scams
Deceptive and fraudulent claims are commonplace in a rogue
industry dominated by ineffective companies that promote debt
settlement scams. After years of investigations and public
feedback, the Federal Trade Commission acted to ban the
widespread advance fee model favored by debt settlement
companies. That ban goes into effect October 27, 2010.
Debt settlement companies claim to be able to slash your credit
card debt by 60% or more. What they don't tell you is
that after paying their fees, additional interest and income
taxes on forgiven debt, you will have likely spent more than you
initially owed when you first hired them. That dreadful scenario
is actually a best-case scenario, since most debtors face
judgments and resulting garnishments, liens and bank account
levies well before they ever complete a debt settlement plan.
Our experience has been that most people that sign up for a
debt settlement plan realize they made a mistake. However, at
that point they have already wasted thousands of dollars in fees
only to find that they have settled nothing and are facing
escalated collections and legal actions.
A few wise consumers at least consider the
pros and cons of debt settlement
prior to agreeing to one of these inadvisable plans. Once they
see how ineffective debt settlement companies really are, they
think twice before signing up for such a scam.
What the FTC Ruling Means
The FTC ruling specifically is based on its Telemarketing
Sales Rule, which prohibits false and misleading claims by
companies communicating with customers by telephone. If a
for-profit debt settlement company sells debt settlement
services by phone, they are now prohibited from charging an
advance fee.
These initial fees typically run from 8-12% of the initial
debt balances. Since most debt settlement companies historically
have required at least $10,000 in debt balances, it is rare that
any client will have paid less than $1,000 in upfront fees which
are due before the company will even lift a finger.
Business as usual for debt settlement companies hawking these
plans is no longer possible. Instead, major debt settlement
trade associations have been scrambling to find a work around
that will allow them to continue promoting debt settlement
scams.
One such idea proposed at an industry conference was for debt
settlement companies to move offshore. Many feel that they could
continue to scam clients despite the ban in similar ways that
online gambling sites and illegal prescription drug sellers have
continued to flourish.
As a consumer, you should remain skeptical of any company
that claims that they can settle your debt for you. Beware of
debt settlement scams that promise results, since there is
no company that is capable of that.
Remember also that the FTC ruling does not expressly prohibit
debt settlement companies from operating or from charging high
fees. It does prohibit upfront fees prior to services being
performed.
In the end, your best bets usually include a self-guided
approach, a debt management program through a credit counseling
organization, settling your own defaulted debt or a personal
bankruptcy filing. Any of these approaches is always cheaper and
more effective than the debt settlement scams that you see
advertised so heavily.
© 2004-2010 Vision Credit Education, Inc. All rights reserved.
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