How to Avoid Debt Consolidation Scams

Debt consolidation can be a great way to get control of your finances. It’s important to know what red flags to look out for to learn how to avoid debt consolidation scams.

What is debt consolidation?

Debt consolidation is the process of combining multiple debts into a single new loan. The most popular tools for individuals to pursue debt consolidation are balance transfer credit cards and personal loans. The best debt consolidation personal loans will be offered to those with great credit, but borrowers may also be able to find a debt consolidation loan with bad credit. If you have a lot of debt or find yourself in a more complicated situation, you may want to seek out assistance. That’s where a debt consolidation company comes into play.

Debt consolidation vs. debt settlement companies

Debt settlement, also referred to as debt relief, differs from debt consolidation in that you’re attempting to negotiate with creditors to pay less than what you owe. The process of debt settlement is typically to stop paying creditors. Then, the settlement company attempts to get creditors to settle for a lower amount.

Debt ConsolidationDebt Settlement
Combine multiple debts into one new loanAttempt to negotiate with creditors
Can pay off debts fasterCan cause greater damage to your credit score  
Simplifies multiple debt payments into oneWork with a debt settlement company  
You still have and must repay all your debtsCould be sued by creditors who want their money
New debt can have lower interest rates, saving your moneyMake payments into an account the company uses to negotiate with creditors

How to spot debt consolidation loan scams?

There are many red flags to look out for when it comes to debt consolidation companies. Keep an eye out for these to avoid debt consolidation loan scams.

  1. They contact you first– Legitimate debt consolidation companies don’t generally cold call or email prospective customers. If you’ve received unsolicited communications from a debt relief company.
  2. The company asks you for an upfront payment- You should never have to pay for debt consolidation or other debt relief upfront. The federal government prohibits debt relief companies from charging upfront fees. And while some debt consolidation companies may charge for their services, you should have to pay until they’ve provided you with a service.
  3. The company is pushy and requires you to act now- Deciding whether or not to consolidate debt is a big decision. And companies that are forcing you to sign up for a program immediately should throw up a big red flag.
  4. The company tells you to cease contact with your creditors- Generally; it’s not a great idea to end all contact with your creditors, even if you’re behind on payments. They may be able to offer you a payment plan or other options to help you get back on track, and ceasing all contact can lead to more severe consequences in the future.
  5. They promise to get your debts forgiven- In some cases, a debt relief company may help you to settle your debt for less than you owe. But it’s illegal for a company to guarantee that they’ll get your debt forgiven or settled. If a company promises any specific results, it’s a scam.
  6. Enrollment without going over your documents- Before agreeing to work with you, a reputable debt settlement company will closely look at your documents to assess your financial situation.

Dos and Don’ts to Avoid Debt Consolidation Scams

Unfortunately, debt consolidation scams are more common than ever and target individuals who are already in a vulnerable financial position. 

Debt Consolidation Dos

  • Research the company online
  • Compare multiple offers
  • Read the fine print
  • Call your creditors

Debt consolidation don’ts

  • Provide payment upfront
  • Feel pressured to sign up
  • Forget to ask about fees

Bottom line

Having significant debt can put you in a vulnerable position. Don’t let scammers exploit it and exercise caution when dealing with debt settlement companies. At the same time, keep in mind that even working with a legitimate debt settlement company comes with serious risks. It’s a good idea to explore other potential solutions before going that route.

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Yonita Alvares
Yonita is the pillar of Client servicing at Moneyfront. She has worked with Citibank for over 25 years in operations and client servicing. In her stint with Citi, she has managed large service setups and her rich experience of banking spans across managing clients, operations, audits and compliance matters. She epitomises ‘client excellence’ in the true spirit of the word. Her motto and single-minded focus is to make sure every client is a happy client.

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