How to spot a debt relief scam

Red flags to watch for

The FTC says these are signs you may be dealing with a scam. Any one of them is reason enough to stop and check.

• They want money before they've settled or reduced any of your debts.
• They guarantee they can settle all your debts, or get you fast loan forgiveness.
• They sign you up without first looking at your finances.
• They talk about a new "government" program that will pay off your debt.
• They tell you to stop talking to your creditors without explaining what can happen.
• They say they can stop all debt collection lawsuits.
• They contacted you out of the blue by call or text, offering to settle your debts fast.

The rule against upfront fees

The FTC's Telemarketing Sales Rule covers for-profit debt relief companies that sell by phone, including when you call them after seeing an ad on TV, radio or online. Under the rule, a company can't collect a fee from you until three things have happened.

If a company asks for a fee before all three, that's a serious warning sign.

• It has settled, reduced or changed the terms of at least one of your debts.
• You've agreed to that settlement or new arrangement with the creditor.
• You've made at least one payment to the creditor under it.

What a dedicated account should look like

Many programs ask you to save money in a dedicated account while they negotiate. The FTC rule allows this only under certain conditions, and they protect you.

• The account is at an insured financial institution.
• You own the money in it, including any interest, and you can withdraw it at any time.
• You can leave the program at any time without a penalty.
• If you leave, the money in the account is returned to you within seven business days, minus any fees the company has properly earned.

Forgiven debt can be taxable

When a creditor agrees to accept less than you owe, the IRS generally treats the forgiven amount as income. The creditor may send you Form 1099-C, Cancellation of Debt, showing the amount.

There are exceptions. One is insolvency: if you were insolvent when the debt was canceled, generally meaning you owed more than you owned, some or all of it may be left out of your income. Claiming an exclusion means filing Form 982 with your return. A tax professional can tell you how this applies to you.

Free help is out there

You don't have to pay anyone to talk to your creditors. You can call them yourself and ask about hardship plans or lower rates. Nonprofit credit counseling organizations offer free or low-cost advice, too. Check any company with your state attorney general before you sign up.

Where to report a problem

If something feels wrong, you can report it. It helps protect other people, too.

• The FTC, at ReportFraud.ftc.gov.
• The CFPB, at consumerfinance.gov/complaint or (855) 411-2372.
• Your state attorney general's office.