Simply signing up for a debt-settlement program can trim points off a consumer's credit score
. And that's often just the beginning of their problems.
The Federal Trade Commission recently released a publication aimed at educating individuals about these agencies, which promise to negotiate down their debt in exchange for high up-front fees and monthly payments. "Settling Your Credit Card Debt" includes warning signs to identify companies that will not be able to eliminate debt.
"Even if they can, clients must put aside money for their creditors each month and may have to pay hefty fees up front to the debt settlement company - putting them further in the hole before they get any relief," the commission said.
Debt settlement companies rope consumers in by promising to eliminate 30 to 70 percent of their debt. Those considering signing up for such a service should minimize their risks by keeping an eye out for certain "red flags," according to the FTC. "Pennies on the dollar" and "new government program" are catch phrases that should stop a consumer in their tracks. The federal government does not sponsor credit card debt cancellation programs.
Consumers may also want to avoid agencies that demand the full fee early on. These companies may take the money and run, without providing any services in return. Many agencies request customers to stop making credit card payments in the meantime. This further complicate their financial woes by slashing points from their score - and remaining on their credit report for years.
Promises to stop debt collection calls and lawsuits should also trigger a red flag among consumers, according to the FTC report. The only person who can put an end to these phone calls is the debtor in question.
Those who have fallen victim to a fraudulent debt settlement scheme may want to file a complaint with the FTC. This will not earn back any lost funds, but can protect other consumers from falling victim to such schemes by enabling the government to take action.
There are safer options for individuals struggling with debt, according to the FTC. Instead of paying a debt settlement agency to negotiate with their lender, consumers should make contact on their own. Modifying their payment plan can help some people remain current on their loans. Credit counselors can also offer insight into an individual's debt-management options.