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Avoiding Credit Repair Scams

As increasing numbers of people struggle with debt and file bankruptcy, many credit repair services have cropped up.  However, it is important to understand that some credit repair agencies do not serve the individual’s best interests and there are pitfalls you should avoid.

A number of federal agencies became concerned about how credit repair agencies deal with debtors—the Internal Revenue Service (IRS) and the Federal Trade Commission (FTC), to name a few.

Credit agency change in focus

The IRS explained in a 2006 report that credit counseling organizations initially had the purpose of offering advice, counseling, and debt management to consumers who were strapped with credit card debt.  The organizations operated as non-profits, charged minimal fees to consumers, and provided valuable services of an educational nature.  Subsequently, the IRS granted such organizations non-profit status.  However, a trend emerged where the agencies began offering less educational benefits and started operating to benefit other for-profit businesses by selling debt-reduction plans.  They no longer charged minimal fees and started making large profits, especially from creditors.

In an attempt to penalize non-profits that began operating as for-profit businesses, the IRS implemented an outreach program to alert the public about problems with the credit repair industry, began scrutinizing agencies more thoroughly through compliance programs that uncovered abuses, and started denying them tax exempt status.

FTC warning

The FTC offers tips to consumers for recognizing a credit repair scam (http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm).  Warning signs include:

  • Demanding upfront payment before delivering repair services (which violates the Credit Repair Organizations Act)
  • No notification of your rights and actions you can take for free
  • Recommendations that you do not contact directly the three major national credit reporting agencies
  • Promises to get rid of accurate, current negative credit information on your credit report
  • Suggestions to create a new credit identity by obtaining an Employer Identification Number instead of using your Social Security Number
  • Encouragement to dispute credit report information although it is current and accurate

If you encounter problems with credit card debt, your best protection against credit repair scams is only to use government approved credit counseling agencies and to work with an experienced bankruptcy lawyer.

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