Don’t ignore these red flags of a debt settlement company eager to prey on desperation.

When you’re behind on credit card or loan payments and feel like you’ll never be free of thousands of dollars of debt, a debt settlement company promising to settle your debt for less than owed may sound like the answer to your problem. If you’re not careful, however, signing up for debt settlement could add even more stress to your money troubles.

While legitimate debt settlement companies exist, debt settlement programs should be a last resort, since the industry is plagued by deceptive practices and misleading claims. There are also plenty of debt settlement scams out there, ready to take your money by reeling you in with exaggerated promises.

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1. Robocalls

Smartphone showing on screen an illegal robocall.

If your first introduction to a debt settlement offer is an illegal robocall, a recorded message claiming a company can wipe out most or all of your debt, that’s not a company you want to call back.

According to the Federal Trade Commission (FTC), debt relief scammers tout their services illegally to consumers on the Do-Not-Call List.  “These operations often charge cash-strapped consumers a large up-front fee, but then fail to help them settle or lower their debts – if they provide any service at all,” says the FTC.

2. Exaggerated promises

Exaggerated promises

When a company promises to persuade creditors to settle your debt for a lower amount, that’s just big talk with nothing to back up the claim. “No one can guarantee that your creditors will forgive your debts,” according to the FTC.

A legitimate debt settlement company may negotiate to reduce a debt, but it won’t guarantee debt-reduction success.

3. Upfront fees

Upfront fees

Charging upfront fees or an upfront lump sum to settle a debt is illegal, according to the FTC. When a company says it will start negotiating with your creditors or providing other services only after you pay a fee (or fees), that company is probably bad news.

When you encounter such a company, do yourself a favor and run the opposite direction. Then help other consumers by reporting the questionable debt settlement company to the FTC.

4. Questionable contact information

Questionable contact information

Just because a debt settlement company has a website doesn’t mean the business is legitimate. Is there an address and phone number that you can call to talk with an actual person? If not, stay away. If there is contact information, you must still be cautious.

Even if there is a number you can call, that’s no guarantee that the company is legit. To dig up more information, research online, check the FTC website, search the Better Business Bureau, and call your state attorney general office to check on complaints.

5. Nothing in writing

Nothing in writing

Don’t take the word of an agent on the phone that a company can solve your debt problems with a settlement for pennies on the dollar or a similar ridiculous claim.

A legitimate debt settlement company will put all terms and fees in writing. Even then, be careful, since the debt settlement industry has its share of disreputable companies.

6. “Government” debt relief programs

Government debt relief programs

When a company promises it can access an allegedly little-known government program or acquire government funds to help you pay or settle debt for a upfront or processing fee, beware. In one such ruse, the scammer targeted churchgoers, accepting payment and then “paying” the bills electronically before canceling payment.

While there are some legitimate government sites that offer programs to help with medical bills or utilities, you don’t have to pay to receive those funds.

7. Dictate to stop communicating with creditors

Dictate to stop communicating with creditors

When a debt settlement company says you must cut off all contact with your creditors and doesn’t disclose potential consequences such as collection actions or damage to your credit, that’s a red flag of a debt settlement scam. Before you sign up for its services, a debt settlement company must disclose possible negative consequences of stopping payments to creditors.

According to the FTC, the debt settlement company must also tell you: fees, conditions and terms of service; how long it will take to achieve results; the amount you must save in a dedicated account before the company will make an offer to each creditor on your behalf; that money in a dedicated account is yours to withdraw at any time without penalty.

Bottom line

Debt settlement isn’t for everyone. But it can save the financial lives of those who qualify, which makes it important to have a free debt analysis before signing up to pay for anything.

First find out the differences between debt management and debt settlement programs – then give us a call. vets the companies we work with. It’s free to call and you may learn you’re better suited for a different debt solution. can match you with an accredited debt relief company that can help you settle your debts for less than you owe.

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About the Author

Deb Hipp

Deb Hipp

Deb Hipp is a full-time freelance writer based in Kansas City, Mo. Deb went from being unable to get approved for a credit card or loan 20 years ago to having excellent credit today and becoming a homeowner. Deb learned her lessons about money the hard way. Now she wants to share them to help you pay down debt, fix your credit and quit being broke all the time. Deb's personal finance and credit articles have been published at Credit Karma and The Huffington Post.

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