How to avoid a debt settlement scam — and get the help you need

For better or worse, debt fuels the engine of the modern economy, with Americans holding a collective $17.05 trillion in the form of mortgages, credit card charges, loans and more. But when you take on more debt than you can handle, it places shackles on your future — and a target on your back for scammers.

Usually, these bad actors disguise themselves as legitimate debt settlement companies (or "debt relief" companies) and offer to negotiate with your creditors on your behalf to reduce how much you owe. CNBC Select explains how debt relief scams work, how to recognize them and what you can do to avoid becoming a victim. 

Typically, a debt relief scam begins with someone reaching out to you with a promise to reduce or settle your debt. They may even claim to be able to remove any negative information from your credit report. In exchange, you pay them an upfront fee for their services. These charges can sometimes be outrageously expensive. For example, in a 2022 lawsuit against a company called "ARCO Services" or "American Consumer Rights Organization", the Federal Trade Commission (FTC) stated that ARCO charged some consumers upfront fees as high as $18,000 falsely promising to eliminate their debt.  

Anyone initiating contact offering to take care of your debt for an upfront fee should immediately raise your suspicions (for one, such tactics are prohibited by the Federal Trade Commission), but don't fool yourself into thinking you're too clever to fall for a scam. "You're in debt, you're overwhelmed, you're stressed out. You know, you're limited with cash flow, you're getting a lot of pressure from creditors, so you're vulnerable," says Leslie Tayne, debt-relief attorney and founder of Tayne Law Group. "And most consumers, unfortunately, under vulnerable circumstances don't make the best decisions."

By the time you've realized the payments aren't resulting in any changes to your debt, it's often too late. "I get a lot of people that come over from companies [that] just disappear — they stopped returning their phone calls," Tayne says. "[Clients] have no idea what happened with their money." 

It's much easier to avoid a scam than deal with the damage it can cause. Below, we'll take a look at common warning signs of debt relief fraud.

If you're in a tough debt situation, knowing the red flags that signal a debt relief scam can help you avoid more financial trouble. Here's what to watch out for: 

• Unsolicited offers: If you're getting phone calls, robocalls or messages offering to help reduce or settle your debt, be on your guard. Reputable debt settlement companies almost never cold-call potential clients. 
• Upfront fees: Be extra cautious if the company is trying to charge you before doing any work. Note that scammers may claim these fees are actually payments to your creditors that will remove negative information from your credit report.
• Bold promises: If a company promises any guaranteed results, such as reducing your debt by a certain percentage or achieving a specific credit score, it's a warning sign. "There's no way to know ahead of time what any creditor is willing to do on any account," Tayne explains.
• Requests to cease contact with your creditors: If a debt relief company instructs you to cut off all contact with your creditors, it's best to stay away from them. 
• Mentions of legal loopholes and government programs: Be wary of companies that advertise little-known legal loopholes or new "government programs" that can get you out of debt. This is most likely just an attempt to appear more legitimate. 
• 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. A scammer doesn't need to do that — they aren't interested in your situation because they have no intention of improving it. 

If you're looking for a legitimate debt settlement company, don't ignore any red flags that pop up and do a Google search, suggests Renauld Smith, executive director of IAPDA Certification, a non-profit organization that certifies and accredits debt settlement companies. If you find negative reviews or very little information, it's wise to choose a different company. CNBC Select ranked the best debt relief companies and recommends the following: 

That said, remember that even working with a reputable debt settlement company comes with risks such as further damage to your credit and potential litigation. That's because debt settlement requires that you withhold payments to your creditors while the company is negotiating your debt. These payments will be reported to the credit bureaus as missed, damaging your credit. The process can go on for years, resulting in charge-offs (dropping your scores even lower) and even lawsuits.  Before you go that route, consider other options. 

For example, if your credit is still good, debt consolidation can be a much safer choice. If you have credit card debt, you can get a balance transfer credit card and move your unpaid balances to it. You'll get a promotional period (often more than a year) during which you won't be charged any interest. This way, you'll get a reprieve from high interest charges. Just make sure to pay off all or most of the debt before the regular APR kicks in. Here are a couple of cards we recommend: 

Further, you can look into consolidation loans. With this type of loan, you merge your debts into one loan with a fixed interest rate and a single monthly payment. While you'll get the lowest rates with a strong credit profile, it's possible to qualify even with bad credit. Just be ready to pay expensive interest charges if you have poor credit. Here are some debt consolidation loans for bad credit we recommend: 

Additionally, you can always reach out to your creditors yourself and explain your situation. There's no need for a go-between. You may be able to come to an agreement and figure out a payment plan that works for you. Of course, there's never a guarantee your lender will offer you any relief options — but you won't know until you try. 

When all else fails, consider reaching out to a credit counselor at a non-profit. They may be able to assist you with debt consolidation or set up a debt management plan for you. The latter is a repayment plan that allows you to make a single payment to the counseling agency which then will pay your creditors. The plan is likely to have a less negative effect on your credit than debt settlement. You can look for a counselor through the National Foundation for Credit Counseling. 

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.

Correction: Renauld Smith works for IAPDA Certification. An earlier version of the story stated Smith worked at American Fair Credit Council.

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