Scams and money go together like fleas and puppy dogs.

The best chance a scam artist has of conning you is to find something that you really need but don’t actually understand. Debt consolidation is one of many areas where scams have worked for the simple reason that people who seek debt consolidation are in a scary financial situation, feel overwhelmed, and don't really understand the options open to them.

Let’s face it. If you’re looking into debt consolidation right now, you are probably not a financial genius. I’m not saying this to insult you, just so that you recognize the facts. This doesn’t make you a bad person, it certainly doesn’t mean that you’re stupid, and it does not mean that you deserve to be cheated.

What it does mean is that financial planning, banking, and dealing with money have not historically been your strong suits. Now that you're in crisis mode, you have even less time to learn about them and figure things out.

Enter the scam artist.

Some scams are pretty easy to spot. Any company that promises you it can “erase your debt” and “fix your bad credit” and “solve your money problems overnight” is lying to you. You’ll see ads for this, TV commercials, signs by the side of the road, and internet sites.

When companies try to make debt relief sound fun, painless, quick, and easy, you are probably not dealing with honest individuals.

The fact is that debt consolidation is a fairly common-sense plan that does not wipe out your debt, may not restore bad credit, and will keep you working at your financial problems for years to come. It’s hard work. Anyone who sugar coats it as some easy fix to “wipe out debt” is conning you.

But there are some scams out there that are way more subtle. That’s because they sound reasonable, even sensible, and you may not be aware of how they’re twisting (or breaking) the law!

The first is a fee-for-a-loan scam. In this scam, you’ll be working with a person (probably a so-called “loan officer” but possibly a “counselor” or “financial advisor”) who promises you that he or she can arrange a special loan for you, providing you pay a fee. This is a violation of federal law! And this person is scamming you.

Here’s why. It is against federal law in the U.S. to guarantee that a loan will be granted for a fee. The reason this is such a clever scam is that similar things are legal.

It is perfectly appropriate for a company to charge you a “loan application fee” or “application fee.” This is a fee that covers the company’s paperwork and expenses as they evaluate your application. The difference is that an application fee is no guarantee you’ll get the loan. Some loans may also charge you a “loan origination fee.” This is a one-time fee (usually small) to get the loan set up; it covers your lender’s expenses in setting up the paperwork and account to handle your loan. The difference is that you are not charged a loan origination fee until the loan is approved and granted.

The fee-for-a-loan is a scam because they can't ask you to pay a fee to guarantee a loan. You can be asked to pay an application fee (and the loan may or may not be granted) or an origination fee (after the loan is granted), but your loan can't be contingent on paying a fee.

A variation on this scam may involve your loan officer suggesting that you pay a fee in order to get a "special loan" or some privileged terms. You'll be told without the fee, you won't get the loan. That's a scam.

If you run into this situation, ask to see the deal in writing. Don’t agree or give any money, just try to get it in writing. (This may or may not work.) If you get it in writing, by all means, call the FBI. (The regulations that are being violated are federal, so it's an FBI kind of thing. They're in the phone book. Ask to speak with the local "agent in charge.")

If you can’t get it in writing, don’t give that lender anything. You can still call the FBI, if you want. And if your potential lender won't let you see the deal in writing, that is a pretty significant red flag right there!

Another scam is a debt relief plan that is sometimes called “no-loan debt consolidation.” Basically, this company will propose that you stop paying your bills and pay them instead. They promise to work with your creditors, negotiating settlements for less than what you actually owe, and you’ll end up paying less and getting your problem solved. You won’t have to take out another loan plus they’ll work directly with your creditors. In fact, they will actually tell you not to talk to your creditors but to let them handle everything. 

This scam is very appealing, because most of us really would like to walk away from our problems and just hand everything over to some nice advisor who will deal with the troublesome creditors and put everything in order and even negotiate some smart deal.

Here’s the scam. They don’t actually work with your creditors but simply take your money until you figure out that your creditors are taking you to collection or court. You end up broke and you’ve basically paid the scam artists for nothing. The scam artist has been taking your money, all right, but he has not paid a nickel to your creditors.

The reason this works well is that it’s similar to services that some companies really do sell. There truly are legitimate debt relief organizations that work with your creditors, negotiate settlements, and allow you to pay them as they pay off your debts. It’s not the concept that’s wrong, it’s the approach.

So how can you know if you're being scammed?

A legitimate company in this situation will usually not propose this kind of solution until you’ve been through some pretty heavy credit counseling. (The scam artist is going to try to “sell” you on this idea right away, before he or she even gets to know you or work with you on your debt.) A legitimate company will never tell you to avoid contact with your creditors; in fact, they will probably be telling you the opposite. (The scam artist does not want you to talk to your creditors, because the sooner you find out he’s not paying them, the sooner you’ll stop paying the scam artist.) One good way to avoid being scammed is to stay in communication with the people who have lent you money, even if you are working with a debt relief organization.

Again, this con works well because it's somewhat similar to a legal way of doing business.

Another type of scam involves going to a debt consolidation service that actually tries to “sell” you on the concept of declaring bankruptcy. In this case, the scam is that they try to take your money for offering the easiest, quickest (but absolutely most disastrous) way out of your situation. It’s like trying to cure a sprained ankle by amputating your foot.

The scam works because they "sell" you services to help you go bankrupt. They may actually do what they say (and charge too much for it), but the scam is that you didn't need that sort of drastic action.

Legitimate debt consolidation is about avoiding bankruptcy. Now this does not mean that a person who has considered debt consolidation never ends up in bankruptcy. It still can happen. But real debt consolidation counselors try hard to avoid bankruptcy. If you find your counselor or company is trying to steer you toward bankruptcy, particularly if that suggestion comes very early in your relationship, beware.

It may be a scam artist or it may just be a lazy, incompetent financial counselor, but either way, you should run.

A legitimate and ethical debt consolidation counselor may suggest bankruptcy as a solution, but that should be as a very last resort. It should only be brought up after every other avenue is exhausted. In other words, by the time the b-word gets spoken, your debt consolidation counselor should know you very well, have had many in-depth sessions with you, and have suggested some other things to you that did not work for one reason or another. Your counselor should also bring up the subject of bankruptcy with a great deal of reservation and he or she should be very upfront about pointing out the downside of bankruptcy. In fact, your counselor should make bankruptcy seem like a scary thing, even if it happens to be your only way out.

While some scams are blatant, there is a breed of scam artist who is very clever. You may find yourself caught in some very subtle schemes. After all, a lot of money is involved in debt consolidation and money always attracts crooks. Besides that, people seeking debt consolidation can be frightened and overwhelmed, which are not good traits in a decision maker.

What should you do if you’re talking to a debt consolidation company or debt relief organization and don’t know what to make of what they’re saying? Even if you’re only slightly unsure of yourself, your home and your money are too important to trust to guess work, hunches, or your instincts.

First, you really need a certified credit counselor (go to the NFCC.org website and find one in your area). They know the regulations, the programs, and may even be aware of scam artists working your area. Do take advantage of their expertise.

Second, your bank probably has loan officers or loan specialists who are experts in the laws and regulations governing loans in your area. They are also probably aware of debt consolidation scams. Make an appointment to see a loan person at your bank. This is free. Plus, if scam artists are working your neighborhood, your bank may know about them (or want to hear about them).

If you are still unsure, you can talk to a lawyer. If you have a lawyer, that’s a good start. If you don’t, hire one. Most people think that lawyers are very expensive, but the fact is that you can probably get this level of information from an attorney at a modest price. Call a local lawyer’s office and explain what you want. Chances are you can sit down with the attorney and in one short visit get all of the information you need. Ask how much the attorney charges. Chances are you will be able to get the information you need for a reasonable amount.

If you still wonder if you're being scammed and don't want to hire an attorney, compare what the lawyer will charge versus what you could be out if you do get scammed or make a legal misstep. It’s likely to be a good bargain.

(By the way, if you do see an attorney, organize yourself before the visit. Bring any notes or documents you might need, and a written list of all of the questions you want answered. Lawyers work by the hour and when the meter is running, you’ll get the most information for your appointment if you’re super organized!)

Last but not least, we can't begin to know all of the scams that are out there. New scams are being dreamed up all of the time! Remember that old advice, if it sounds too good to be true, it probably is!

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