Legitimate debt counselors can't repair credit or cancel debts. Programs claiming to reduce debt 50-75% may trigger collection and lawsuits, worsen one's credit rating.

According to the FBI, the Federal Trade Commission, Federal Reserve Board and the Office of the Comptroller of the Currency (OCC), fraudulent credit relief scams prey upon debt-strapped borrowers. These phony programs seem too good to be true, because they are. Gullible debtors who are lured into these plans, particularly those with unsecured obligations like credit cards, often lose more money than they originally owed.

Scam No. 1--Debt Elimination

Avoid fraudulent programs that claim to eliminate, terminate or cancel debts, especially credit card obligations, or have them declared invalid. "Don't believe it. There are no loopholes," warns the FBI. Operators of these scams advertise heavily on the Internet, TV, radio, in newspapers and via direct mail, and even hold seminars. They often guarantee results, and usually charge an upfront “membership,” "voluntary contribution," "donation" or service fee from several hundred to thousands of dollars.

Individuals who enroll in these programs won’t lessen their debt, often lose the up-front money and further damage their credit ratings. Worse, creditors can sue those who use fraudulent means in trying to eliminate a legitimate debt.

The scam artists promise to wipe out debt using one or more strategies that sound enticing, but have no basis in law or finance:

• They cite secret laws known only to them as the basis for eradicating financial obligations.
• They allege that creditors lack authority to extend credit, lend money or charge interest, and that the contract is illegal.
• They assert that a person’s debt is really an asset to the credit-grantor, making the obligation in effect a “deposit” in a bank.
• They persuade debtors that they can establish their own arbitration companies to “certify” an “award” that diminishes or cancels a debt.
• They state that creditors will not pursue debt collection after one participates in one of these schemes.

The common thread among these up-front fee schemes is to fool debtors into paying often large sums of money to have an obligation cancelled. Sometimes, the ruse involves consumers submitting false documents—supplied by the scam artists—to creditors, such as fake arbitration awards, phony discharge certificates, worthless US Government or foreign debt instruments, or non-existent trust accounts.

Victims of these schemes lose more than their up-front money. Credit card companies often become more assertive in demanding repayment and may sue to collect. Some victims have their identities stolen.

Scam No. 2--Debt Reduction

These schemes promise to reduce a consumer’s debt 50% or more by enrollment in a debt negotiation program. Con artists convince victims that creditors will cease pursuing repayment. In fact, collection efforts not only do not stop; they often become more relentless. In reality, these plans seldom if ever lessen debts, and they often inflict severe harm on borrowers, sometimes forcing them to file for bankruptcy.

How the scam works:

Credit “counselors” claim they have unique alliances with creditors, and will use these special relationships to negotiate debt for a fraction of the amount originally owed. Debtors are told to suspend making regular payments, and instead to send funds to the debt management firm—often a for-profit firm posing as a friendly non-profit organization—that claims it will deposit the money into a “trust” account dedicated to paying creditors. Counselors promise they will use their clout to halt annoying calls and letters from creditors. Debtors are thus duped into believing the advisors are applying the trust account funds to pay their now-reduced outstanding debts.

In reality, the counselors first divert hundreds of dollars as fees, which they do not always disclose. Consumer payments are neither applied to the trust accounts nor sent to creditors, until these fees are paid in full. Consequently, creditors often receive nothing for months and pile on late fees and penalties and may boost interest rates. Many borrowers are shocked to discover that their debts actually increase after enrolling in these programs. Often, unpaid creditors pursue collection more vigorously, and may sue debtors who have defaulted.

Legitimate Debt Management Programs

Trustworthy debt counselors such as Consumer Credit Counseling Service, Atlanta, can help stop collection calls and reduce interest rates and late and over-limit fees. They cannot repair a damaged credit score, or reduce the amount of debt. Negotiation that lessens the amount owed is listed as a score-damaging charge-off on a credit report, and the blemish remains on one's record for seven years. Also, cancelled or forgiven debts must be reported to the IRS as income.

Reputable counselors also can help in developing budgets, managing money, using credit wisely and building a savings plan. They can assist in paying down outstanding debt through repayment programs that may lessen monthly payments and interest and related fees.

Further Information

FBI Federal Trade Commission Office of the Comptroller of the Currency

US Senate Abusive Practices Report National Foundation for Credit Counseling

Federal Reserve