Debt consolidation scams attempt to take advantage of people who have multiple debts they’re desperate to get out from under. There have been many debt consolidation scams in recent years, but they tend to fall into two major categories. The first is simply failing to provide promised services. One recent example of this is Financial Freedom National, Inc. (and a network of related companies), which received fines totaling $35 million in 2017 for their phony programs. The other major type of debt consolidation scam is charging fees upfront, which is illegal. For example, a ring of companies in Los Angeles was busted for doing this in 2019 by the FTC, which returned $5.4 million to defrauded customers.
In short, these types of scammers act as if they provide debt consolidation services but only want your money. Legitimate debt consolidation programs, on the other hand, use their resources to negotiate with creditors and help lower borrowers’ APRs or settle their debts. Then, the customer makes one monthly payment to the program, and the debt consolidation company distributes payments to the individual creditors. With a debt consolidation scam, the “program” just takes the customer’s cash rather than negotiating on their behalf.
There are several ways to tell if a company is likely a debt consolidation scam, from whether they ask for money upfront to whether they are clear about their terms.
Signs of a Debt Consolidation Scam:
They ask you to pay upfront. The only reason you’d have to pay anything upfront for debt consolidation is if you take out a loan or credit card that has an origination fee or balance transfer fee. Legitimate non-loan debt consolidation programs will only ask you to pay after they successfully reduce your rates or settle your debt. In fact, charging fees upfront is illegal.
They’re not accredited. Legitimate debt consolidation companies are accredited by or members of reputable organizations or government bodies. Some examples include the American Fair Credit Council, Council on Accreditation, National Federation for Credit Counseling, U.S. Chamber of Commerce, and Department of Housing and Urban Development.
They guarantee success. No debt consolidation program can legitimately guarantee that they can get your rates reduced or settle your debt. There’s always the possibility that the creditor can refuse.
Their website isn’t secure. If a company’s web address doesn’t have “https” in front of it, it lacks encryptions that keep your data safe.
Your creditors warn you about them. Before working with any debt consolidation company, try calling your creditors and asking if they are familiar with that company. If your creditors recognize the company as a scam, they can warn you about it.
They’re not upfront about their terms. If a company is not willing to give key details up front, including what fees they charge, they probably are not legitimate. Reputable programs should give you a free consultation in which they explain your options.
One thing that’s not necessarily a scam but is very misleading is when companies use the phrase “debt consolidation” but really offer debt settlement services. So make sure that you’re aware of what any company offers before you accept a program with them.
If you find a program that you think is being used to scam customers, you should report it to the Federal Trade Commission. It’s easy to file a complaint online through the FTC’s complaint assistant.
Debt Consolidation Scam Examples:
- 2019: The FTC filed a restraining order against Arete Financial, forcing them to stop operations after they allegedly charged illegal upfront fees on phony student debt relief programs, including consolidation. The company agreed to pay at least $835,000 to settle the FTC’s allegations.
- 2019: The FTC stopped a student loan debt relief scheme called Mission Hills Federal, which allegedly stole more than $23 million while promising to consolidate students’ debts and lower their monthly payments. A $27.6 million judgment was imposed against the company in 2020.
- 2019: The FTC returned more than $5.4 million to customers who paid money to fake student debt relief companies. The companies were based in Los Angeles and went by such names as Grads Aid, United Legal Center, LLC and Academic Aid Center. These fake companies promised debt consolidation or settlement and charged illegal upfront fees.
- 2018: The FTC reached an $11 million settlement with Impetus Enterprise, Inc., which promised to help reduce student loan costs and failed to deliver. One of the services this company pretended to offer was consolidation. The ringleader of this scam was permanently banned from the telemarketing industry.
- 2017: The FTC and the state of Florida shut down 11 connected companies (such as Financial Freedom National, Inc.) that took tens of millions of dollars without negotiating for customers. They had to pay a $35 million settlement.
Those are just a few instances of scams that have been busted. But there are undoubtedly more out there, so it’s important to be vigilant when pursuing debt consolidation.
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