The federal Consumer Financial Protection Bureau (CFPB) has released important advice on avoiding the debt consolidation and debt relief programs many people use to deal with debt. According to the CFPB, debtors should avoid doing business with a company that promises to settle debt if it:
- Charges fees before it settles debt (this may be an illegal practice) see Freedom Debt Relief Ordered to Repay Millions;
- Makes representations that it can settle all the debt for a promised percentage reduction (many creditors refuse to work with these debt settlement companies);
- Suggests there is a “new government program” for debtors with credit card debt;
- Makes guarantees it can eliminate debt;
- Tells debtors to stop communicating with creditors;
- Tells debtors it can stop debt collection and lawsuits (in fact, debt collection and lawsuits will most likely continue even while participating in a debt settlement program;
- Makes guarantees that debts can be paid off for pennies on the dollar.
The CFPB advises debtors that debt settlement companies often charge expensive fees and their debt will likely increase, wiping out any savings the company may be able to achieve in settling debts. The agency goes on to say that in many cases the debt consolidation or relief companies are unable to settle all of someone’s debts, perhaps leading to debtors being deeper in debt than they were when starting with the company. There may also be tax consequences if the companies do reach agreements with creditors to forgive debt and using debt settlement services can have negative impacts on someone’s credit score.
The CFPB suggests that before debtors sign contracts with a debt relief company they first consult with a bankruptcy attorney or nonprofit consumer credit counseling agency. For example, filing bankruptcy does not result in tax consequences when debt is forgiven and the cost is often many thousands less than the fees charged by a debt relief company. If you’re considering using a debt consolidation or debt relief company contact us first to review your options.