Debt settlement scams involve companies making unrealistic promises to help relieve debt without full disclosure of the possible negative ramifications to the consumer, reports the Federal Trade Commission. Unscrupulous debt settlement companies often illegally charge consumers high upfront fees before negotiating settlements with creditors.
Debt settlement companies typically negotiate with creditors for consumers to settle debt by paying back a smaller amount than they initially owe, explains the Federal Trade Commission. Consumers transfer money monthly into a special account to handle the debt. Companies that scam consumers make promises such as guaranteeing to make debt go away before initiating settlements, negotiating payments of pennies on the dollar for debt, fictional government programs that help handle debt and protection from creditor communication. They neglect to inform consumers that creditors may not agree to settle, their credit scores and credit reports may be negatively impacted, interest and penalties may continue to accrue to make debts larger, and creditors can still sue them for unresolved debt.
Before working with a debt settlement company, consumers should check for complaints with consumer protection agencies and the state attorney general, suggests the Federal Trade Commission. Debt settlement companies are legally only allowed to collect fees after successful settlements and must give consumers full disclosure of their prices and the possible consequences of their settlement attempts. The funds and interest in the special account belong to the consumer, who has the right to withdraw the money penalty-free at any time.