How can I determine if a debt consolidation offer is real or a scam?

A friend of mine recently attempted to go though debt consolidation. He received a phone call and was offered really good terms to consolidate his current debts. A promise was made that the company would negotiate with the creditors and reduce their debt by nearly 60%. This included 30k in Student loan debt and about 15k in other debt.

They were advised to stop making payments on their debts and send the money instead to the debt consolidation company. The company said it would then pay off the debts and issue the a loan for the reduced amount. Well 2 months went by with them sending the required payments via certified check. In this time they defaulted on their car loan and their student loans. The company said they would take care of it not to worry. Even took contact information for the companies.

Finally the company told them they were sorry they were not able to help them. That the money they had sent was for the application and approval process. The company is now out of business and the AG is investigating but the investigators said that any recovery was unlikely. What steps can people take to be sure that the debt consolidation offer is real?

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2 Responses to “How can I determine if a debt consolidation offer is real or a scam?”

  1. I think in such situations a good rule of thumb may be – if you are asked to pay significant sums of money upfront before anything is done, stop and ask yourself, what would you do if they don’t do what they promised? They know who you are, but usually most you know is a company name and phone number. Both can disappear in a minute and what are you left with?

    If they said they’d pay off the debt and issue the new loan – fine, let them do it and then you pay them. If they insist on having money upfront without delivering anything – unless it’s a very big and known and established company you probably better off not doing it. Either it’s a scam or in the minuscule chance they are legit you still risking too much – you’re giving money and not getting anything in return.

  2. I believe no-one who’s in a legal line of business would tell you to default voluntarily on your obligations.

    Once you get an offer that’s too good to be true, and for which you have to do something that is either illegal or very damaging to you – it is probably a scam.

    Also, if someone requires you to send any money without a prior written agreement – its probably a scam as well, especially in such a delicate matter as finances. Your friend now should also be worried about identity theft as he voluntary gave tons of personal information to these people.

    Bottom line – if it walks like a duck, talks like a duck and looks like a duck, it is probably a duck. Your friend had all the warning signs other than a huge neon light saying “Scam” pointing at these people, and he still went through it.

    For real debt consolidation companies, research well: online reviews, BBB ratings and reviews, time in business, etc. If you can’t find any – don’t deal with them. Also, if you get promises for debtors to out of the blue give up on some of their money – its a sign of a scam. Why would debtors reduce the debt by 60%? He’s paying, he can pay, he is not on the way to bankruptcy (or is he?)? Why did he do it to begin with?