Credit Counselor Frauds

Our office, along with former New York Attorney General Oliver Koppell, have sued several of these so-called “credit counselors” for deceiving consumers with claims about taking care of their credit card debt.

With over a million Americans filing for bankruptcy each year, and with household debt at record highs, consumers are reaching out to “credit counselors”, “credit negotiators” and “credit repair” companies with increasing frequency. Although there has been a recent surge in the number of these organizations that are available to offer help to consumers, there has also been an increase in the number of unscrupulous operators who are ready to take advantage of unsuspecting debtors. Following are some tips on avoiding credit repair and credit counseling scams.

Credit Counseling Scams

As in credit repair scams, some so-called “credit counselors” prey on overwhelmed consumers, promising “a clean slate” (often for a flat, up-front fee). Some counselors promise to contact creditors and convince them to accept lower payments, or to charge lower fees and interest rates. In many cases, unfortunately, the only ones who end up in better financial shape as a result of these “efforts” (or the lack thereof) are the counseling organizations themselves, while the consumers are left with even fewer resources as a result of high fees and more delinquent debts.

There are, however, credit-counseling agencies that are reputable and actually provide valuable services to financially overwhelmed consumers. Tips that can help consumers avoid the scams include:

• Beware of promises that sound too good to be true. Claims of helping you “get out of debt easily” are a red flag.
• Deal with a reputable agency. Check with state consumer agencies and the local Better Business Bureau to make sure there have been no or few complaints against the organization, and that the complaints that have been raised were favorably resolved.
• As a general rule, non-profit credit counseling organizations are the best choices. There are also reputable for-profit companies, but screening the good from the bad will require greater consumer diligence.
• Verify that the organization provides counseling and education, as well as debt consolidation and payment services, to help consumers achieve financial stability and remain debt-free.
• Carefully read through any written agreement that a credit counseling organization offers. It should describe in detail the services to be provided; the payment terms for these services, including their total cost; how long it will take to achieve the desired results; any guarantees offered; and the organization’s business name and address.
• Avoid paying up-front fees. Reputable agencies do not charge big up-front fees, but may take a small monthly fee for a debt repayment service. The initial consultation, however, should always be free.
• Beware of any high fees or required contributions, like high monthly service charges, that may add to the overall debt load and defeat efforts to pay off bills.
• Confirm payments with creditors. Some debt repayment services require the consumer to periodically send it one lump-sum check that it divides up among the creditors. Debtors who enter into these types of arrangements should verify with their creditors that the payments are actually being made.

Credit Negotiator Scams

Debt negotiation or debt settlement firms often claim they can get your creditors to discount your debts, so that you end up paying anywhere from 10% to 50% less than what you actually owe. Unfortunately, many of these companies charge steep fees while making promises they cannot keep. If you are considering debt negotiation as a solution to your financial troubles, consult with a legitimate credit counseling agency for advice, and then negotiate with creditors on your own.

What Is Debt Negotiation?

Technically, debt negotiation is when you (or someone acting on your behalf) attempt to get your creditors to accept less than the amount you actually owe in order to settle your debt obligations. You can contact your creditors yourself or designate someone else to negotiate for you. Some legitimate, nonprofit credit counseling agencies will advise you on how to negotiate with your creditors, or they may even contact creditors for you. However, according to the Federal Trade Commission (FTC), for-profit companies that bill themselves as “debt negotiation firms” usually charge hefty fees and often cannot make good on their promises.

Debt Negotiators’ Claims Versus Reality

Unfortunately, many debt negotiation companies make promises or guarantees that they cannot (or never intend to) keep. For example, many of these companies:

• guarantee that you’ll end up paying pennies on the dollar to settle your debts
• guarantee that some of your debts will be eliminated altogether
• tell you that unsecured creditors never sue debtors for non-payment of debts owed, and
• claim they can remove accurate, negative information from your credit report.

While it is true that creditors are free to renegotiate debts, the reality is that:

• Creditors are not obligated to accept partial payment of a debt.
• Creditors can (and often do) sue consumers for nonpayment of debts.
• No one can remove accurate, timely information from your credit report. Some debt negotiation firms can also cause irreparable damage to your credit by telling you to stop paying your credit cards and other unsecured debts. When this happens, late fees and interest are added to your debt, causing the amount due to double or even triple. In addition, creditors may report the nonpayment on your credit report, harming your ability to get credit in the future.

What debt negotiation firms don’t say can also hurt you. For example, these companies often fail to tell consumers that forgiven debt may be treated as taxable income by the Internal Revenue Service.

Debt Negotiation Fees and Scams

Many disreputable debt negotiation firms charge high fees for their services, including:

• a fee to open your file
• monthly fees for services, and
• a percentage of the money you’ve supposedly saved.

This money could be going to pay your debts, but instead it’s being pocketed by the firm. Essentially, you end up adding one more payment to your monthly debt load.

Some firms require that consumers make monthly payments to them, rather than to creditors. Then, according to the FTC and consumer protection agencies, these firms keep some of that money without telling the consumer — or worse, never pay the creditors at all. The consumer is left with the original debt, plus late fees and interest, all the while having paid large sums of money into the debt negotiation firms’ coffers.

Credit Repair Scams

Every day, companies appeal to consumers with poor credit histories — promising, for a fee, to clean up their credit reports so they can get a car loan, a home mortgage, insurance, or even a job. The truth is, after consumers pay hundreds (or even thousands) of dollars in up-front fees, these companies do nothing to improve the debtors’ credit. Worse yet, many “credit repair” companies simply vanish with the unsuspecting consumers’ money.

The red flags that should alert consumers to credit repair scams include:

• The company wants the consumer to pay for credit repair services before any services are provided.
• The company does not inform consumers about their legal rights, and actions they can take themselves — for free.
• The company recommends that consumers not contact a credit bureau directly;
• The company suggests that consumers try to invent a “new” credit report by applying for an Employer Identification Number to use instead of their Social Security Number.
• The company advises consumers to dispute all information in their credit report, or take any action that seems illegal, such as creating a new credit identity. If consumers follow this illegal advice and commit fraud, they themselves may be subject to prosecution.