A lawfully created debt management or debt settlement company is bound by federal and state regulations regarding operation and communication with potential clients. Separating a legitimate debt management company from a scam operation is a matter of information. The more information clients are given regarding the company's business practices and track record of consumer advocating, the more likely it is that the business is legitimate.
Upfront Fees and Charges
The Federal Trade Commission's Telemarketing Sales Rule prohibits a company selling debt management or debt settlement services from charging you any fee for services until the company works to settle or reduce your debt. A company that attempts to charge you an upfront fee for service without advocating on your behalf with your creditors is most likely not a legitimately licensed debt management company. This type of business is attempting to use your financial crisis to turn a profit and may leave you in a worse financial situation than when you approached the company for help.
Disclosing Important Information
A lawfully licensed debt management or debt settlement company must fully disclose the terms of your agreement with regard to price of participation in the program, conditions of service and how the company intends to help you lower your overall debt. A company that obfuscates its debt management practices and provides vague information on how your money is used to pay your creditors is probably a scam waiting to happen. Do not sign with a debt management company or give it any of your financial information if you cannot obtain a clear picture of how the company operates.
Holding Your Money
How a debt management or settlement company uses your money to pay your creditors can be an indicator as to the legitimacy of the business. Contact your creditors regularly when you sign on with a debt management company to make sure your funds are distributed appropriately. A debt management company that holds on to your money too long can cause you credit problems by having delinquent payment notations placed on your credit report. It's your money, and you are ultimately responsible for paying your creditors on time, even if a debt management company is making the monthly disbursements on your behalf.
Communication Problems and Guarantees
A debt management or settlement firm that tells you to stop communicating with your creditors is most likely fraudulent, according to the Federal Trade Commission's website. Communication with your creditors is a key element in managing your debt and ensuring your account is being properly paid each month. Additionally, a debt company is most likely illegitimate if the business promises to stop all collection practices and phone calls from creditors. The only way to stop collection practices is to bring your accounts current. Unless the debt management company shows you a plan of how the business intends to bring your accounts into good standing, collection practices will continue.
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