The news recently has been full of the staggering debt levels Americans are carrying: Credit card debt has hit new highs since the 2008 recession; 1 in 3 Americans have debt in collection; 40 million borrowers owe $1.2 trillion in student loans, an 84% jump since the recession; and millions of workers now have wages seized (garnished) over healthcare and student loan debt.

These trends have inspired more firms to advertise debt relief and help with improving low credit scores for those with debt problems. There is also a lot of confusion surrounding various services and a wealth of debt traps related to the predators providing them.

These trends have inspired more firms to advertise debt relief and help with improving low credit scores for those with debt problems. There is also a lot of confusion surrounding various services and a wealth of debt traps related to the predators providing them.

One of the major problems for consumers today is that many of the smaller firms fly under the radar of federal regulators monitoring these services: the Federal Trade Commission (FTC) and the Consumer Finance Protection Bureau (CFPB). While there are professional companies and scam artists in any industry, we’ve classified debt service providers as the good, the bad, and the ugly based on the overall solutions they offer, their tendency to mislead clients, and the predatory abuses common within that industry.

The Good: Credit Counseling Firms

Credit counseling firms are generally hired to help consumers manage and work out a debt reduction plan. There are major differences between firms in this diverse industry, so do your research and avoid the potential traps highlighted below.

• Most are non-profit organizations, but this is often misleading since their services — other than the initial consultation — are typically not free.
• Average fees can range from 10%-50% of the total debt owed.
• Many will reach up-front agreements with creditors so the harassing phone calls will stop.
• They focus more on debt consolidation, but can sometimes negotiate lower payoff amounts (debt reduction).
• Any debts that might be “forgiven” will create a tax liability for the borrower, and can remain as “unpaid” on a credit report for up to seven years.
• Many require a minimum of $5,000-$10,000 in credit card debt before they’ll accept a new client since they may also be paid by the credit card companies for debts collected.
• Those who focus on student loan debt aren’t always knowledgeable about the pitfalls of consolidation. Borrowers could miss out on lower payment options, special consolidations, or debt forgiveness programs on federal student loans.
• Many firms require clients to sign a Debt Management Plan (DMP) agreement, which clients cannot get out of until the debt is completely paid, which can last up to ten years.
• A DMP requires clients to close credit card accounts and not open new accounts, both of which can negatively affect the client’s credit score for years.
• Borrowers are unable to obtain a mortgage or refinance their home during this time.
• Counselors are responsible for paying creditors. Unfortunately, some fail to do so and flee with the client’s money. Be sure to follow up with creditors to ensure timely payments are being made.

The Bad: Credit Repair Firms

The credit repair industry has exploded over the past few years, and now exceeds 127,000 firms nationally, according to IBISWorld. Let’s take a look at the reality of many firms’ operating tactics and the latest abuses in this field.

Credit repair firms send letters to credit bureaus to correct errors, but that’s typically all they do. Many even contain fake or fraudulent information. See FTC: Bogus Letters Earn an “F”.

Many illegally charge up-front fees. The firm noted above charged $40 million in illegal advanced fees for this service.

• They often claim they can provide a new credit “identity” using a 9-digit CPN (Credit Profile Number) rather than using a social security number. The FTC reports this is a scam, and those who use a false identity are committing a felony, which can result in a steep fine or prison sentence.
• They cannot change correct data, so if a score is low due to a foreclosure, bankruptcy, or tax lien, there’s nothing they can do.
• Since their services typically do not include contacting creditors, they can’t negotiate a lower payment, stop harassing phone calls, or prevent lawsuits.
• The Credit Repair Organizations Act (CROA) makes it illegal for credit repair firms to lie about what they can do for you, or to charge a fee before they’ve performed a service. For options to remedy abuse, see FTC: CROA or call 877.FTC.HELP.
• You can repair errors yourself by going to FTC: DIY Credit Repair.

The Ugly: Debt Settlement Firms

Debt settlement firms are flourishing since many promise a quick fix to make bills disappear. While debt elimination could be helpful if it works, there are also significant risks.

• Those offering the service are generally for-profit companies or law firms.
• They promise to settle with creditors for much lower amounts than owed.
• They generally have no up-front agreement with creditors; in fact, some creditors actually refuse to work with debt settlement companies.
• Those offering to settle tax liens are often scammers. An offer to settle for less than you owe is rare. This FTC: Tax Relief report states that most taxpayers don’t qualify for the programs these fraudsters hawk, their companies don’t settle the tax debt, some send no information to the IRS, and debtors end up further in debt.
• Any amount “forgiven” is considered taxable income.
• Many illegally charge an up-front fee, plus a monthly fee, which can total up to 10%-50% of the debt initially owed. See the latest CFPB action.
• Most recommend clients immediately stop communicating with creditors and cease making all payments.
• These actions trigger additional fees and penalties, defaults on loans, a lower credit score, and possible liens, garnishments, or lawsuits.
• They can’t stop harassing phone calls.
• They often contact prospects through robo-calling, a practice that is now illegal.
• Many claim that the collected amount — minus the fee charged by the firm — will go into a trust account in the client’s name, but many clients are never able to access that money if they drop out of the program, especially when working with smaller firms.
• Since it can sometimes take years to build up enough to settle the debt, most clients drop out of the program and eventually file bankruptcy…but are now further in debt.

We hope this will help those struggling with debt be more informed when selecting the right firm.

Go to these specific sites to learn more FTC: Settling Credit Card Debt, CFPB: Debt Settlement Help, and National Foundation for Credit Counseling (NFCC). If you’ve been a victim of one of a dishonest firm, go to FTC: Complaint Assistant or CFPB: Submit a Complaint.

Feel free to share this information with anyone you think might need the help and leave any comments or questions below for me!