Don't Fall Victim to Debt Consolidation Scams

by Dawn Handschuh, Personal Finance Writer   

The economy continues to wallow in a persistent case of the doldrums, unemployment is still rising, and adjustable-rate mortgages are still resetting to higher rates. Against such a bleak economic climate, complaints against debt consolidation and negotiation companies are rising, too, as borrowers get squeezed.

Debt consolidation companies purport to consolidate multiple debts into a single obligation so that the borrower can make a single, lower monthly payment to the debt consolidation company, which is supposed to make payments to various lenders on the borrower's behalf. The idea behind debt consolidation is to make bill-paying more manageable, but the excessive fees and interest rates charged by many debt consolidation companies often sink consumers even deeper into debt. 

When mounting bills threaten to derail your household finances, it's easy for desperation, fear and anxiety to send you running toward any debt consolidation company that promises relief.

Beware of any debt consolidation company that sounds too good to be true

Debt consolidation companies often exaggerate claims of what they can do, like promising to cut your debt in half or erasing negative records in your credit report. Other red flags, the FTC warns, include companies that demand high up-front fees, withhold information about their services until you supply your personal financial information, skip discussion of money management techniques or budgeting, or don't spend any time reviewing your particular situation.

How can you protect yourself from unscrupulous companies that routinely hatch debt consolidation scams to separate you from their money?

• Before turning to a debt consolidation company, talk with your lenders to try to create a workable debt repayment plan. Be candid about your circumstances, but stay calm and be prepared to state the facts. Many lenders will be willing to talk to you, because they realize that getting a portion of their debt repaid is better than getting nothing at all, which could happen if you declare bankruptcy.
• If you have no luck negotiating your debt with lenders, make an appointment to speak with a representative at a credit counseling service. Credit counselors may charge a small fee or nothing at all. The National Foundation of Credit Counseling is a reputable organization through which you can locate a credit counselor near you. For more details on how to choose a credit counselor, visit the Federal Trade Commission website.
• Don't be swayed by claims of non-profit status by a debt consolidation company. Such claims are no guarantee that their services are on the up-and-up.
• If you do decide you need the aid of a debt consolidation company, run a check on the company with your state's attorney general's office and at the Better Business Bureau (BBB).  Companies that are BBB-accredited meet the BBB's accreditation standards, although the BBB doesn't evaluate or endorse accredited businesses.