Debt Relief Companies: How to Choose One and Avoid Scams

When debt feels overwhelming, it’s easy to say yes to anyone who promises relief. Some debt relief companies do help people. Others charge high fees, make promises they can’t keep and leave people deeper in debt. Federal agencies like the CFPB and the FTC have warned about this for years. This guide lays out the warning signs, the questions to ask, and how to check a company before you hand over any money or information.

The short answer

Before you enroll in any debt relief program, get the fees, the risks and the promises in writing, check the company with an independent source, and compare it with the free or low-cost alternatives. If a company pressures you to sign right away, walk away.

Red flags

The CFPB and FTC advise thinking twice about any company that:

• Charges a fee before it settles or reduces any of your debt. For services sold by phone, federal rules don’t allow this.
• Promises to make your debt go away or guarantees a result.
• Tells you to stop talking to your creditors.
• Tells you to stop paying your debts without clearly explaining what that can do to your credit, your balances and your risk of being sued.
• Says it can stop collection calls or lawsuits. No company can promise that.
• Claims to use a “new government program” to bail out credit card debt.
• Pressures you to enroll right now, or won’t give you its fees and terms in writing.

Questions to ask before you enroll

• What is every fee, how is it calculated, and when is it charged?
• How much do I need to set aside each month, and for how long?
• Do you tell me to stop paying my creditors? What can happen to my balances, my credit and my risk of a lawsuit while I’m not paying?
• Where is my money held? Is it in an account I own and control, and can I take it out at any time?
• What happens if a creditor refuses to settle?
• Which of my debts can you include, and which can’t you?
• Are you licensed to operate in my state, and can I see the license?
• What are the possible tax consequences of settled debt? See taxes on settled debt.
• Can I cancel, and what would I owe if I did?

A company that answers clearly and gives you everything in writing is a better sign than one that dodges. It isn’t proof that the program is right for you.

Why “20%” can mean very different things

Fees are often quoted as a percentage, but a percentage of what? This is an illustration with made-up numbers. Say you enroll $20,000 in debt, and your debts end up settled for a total of $10,000.

• Company A charges 20% of the debt you enroll: 20% of $20,000 is $4,000.
• Company B charges 20% of the amount actually settled: 20% of $10,000 is $2,000.

Both say “20%,” but the fee differs by $2,000. Always ask what the percentage is applied to, and ask for the fee in dollars for your situation.

How to check a company

• Your state. Ask your state attorney general or state banking or financial regulator whether the company is licensed or registered where you live, and whether there are complaints.
• The CFPB. Search the CFPB’s consumer complaint database for the company’s name.
• The FTC. The FTC publishes advice on debt relief and takes reports of scams.
• The contract. Read it fully before you sign, and don’t sign anything you don’t understand.

What to try first

Free or low-cost options often come before paying a company:

1. Call your creditors. Explain your situation and ask about hardship options, a lower rate, or a payment plan. The CFPB suggests this, and that you can negotiate yourself.
2. Talk to a nonprofit credit counselor. They can review your budget and may offer a debt management plan.
3. Compare your options. See debt settlement vs. consolidation vs. credit counseling and how debt settlement works.

A note about the company shown on this page

Companies shown on this site pay us when you click or apply, and showing a company isn’t an endorsement or a guarantee of results. Run any company through the checklist above, including the ones we show. Our advertiser disclosure explains how we’re compensated.

This article is for general information and isn’t financial, tax or legal advice. Examples use made-up numbers.