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Types of Debt Scams
Bogus Get Out of Debt Free Cards
Some con artists use a blend of cobbled-together legalese and out-of-context quotes from federal officials to convince their victims that they are not legally responsible for their debts. Consumers who take the bait may receive phony documents, which, they are told, will absolve them of their debts once presented to their creditors. Victims then present the bogus documents to their creditors only to find out they've been had. A variation on this trick includes instructions for the victim to file what they don't realize is an improper motion to discharge their debt. Both of these acts put the victim at risk of federal fraud charges.
Fraudulent Credit Counseling/Negotiation Services
Honest credit counseling services can provide much needed assistance, helping consumers learn how to manage their finances and pay off their debts. Many of these services, unfortunately, are fronts for for-profit outfits looking to make money off of consumer debt. The worst are outright scams. They may claim (falsely) to be able to negotiate sweetheart deals with credit card companies, in exchange for huge upfront fees. Or they may simply offer to play the middleman for you, charging you one lump sum every month, paying your bills and collecting a hefty monthly fee in the process. Either way you end up paying more than you should.
Even "non-profit" counseling agencies can do serious harm by charging exorbitant fees and providing bad or deceptive advice. These harmful and phony services reach out to consumers through emails, Web sites and by phone, promising reduced interest rates and big savings with their programs. Unfortunately, many actually create more financial hardship for consumers seeking help with their already unmanageable debt.
Consolidation Loans
Some consumers turn to loan consolidation to help rein in their debts. Consolidation can work, under the right circumstances, but you've got to be careful. Fees, expensive add-ons, and fine print can end up costing you big bucks in the long term. Consolidating your debt with a secured loan (a home-equity loan for example) will likely save you money on interest, but you have to be willing to risk your collateral (your house, in the case of an equity loan). Consolidating debts into an unsecured loan (a personal loan, basically) may not save you much money, as their interest tends to be high, especially for someone with credit troubles. For either type of consolidation loan, it's crucial to_ remember that lower monthly payments generally mean you'll pay more over time.