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GAO: Debt settlement firms mislead consumers

By Leslie McFadden · Bankrate.com
Wednesday, April 28, 2010
Posted: 9 am ET

Ever been curious about ads that say you can eliminate your credit card debt for "pennies on the dollar?" The government has certainly taken an interest. A Senate committee asked the U.S. Government Accountability Office to conduct a covert investigation into allegations that some debt settlement firms are engaging in fraudulent, abusive or deceptive practices. The GAO did this in part by calling 20 companies and posing as consumers with heavy credit card debt.

In a hearing before the committee last week, the GAO reported on its findings. Basically, it concluded that some companies do engage in abusive practices that can harm consumers.

"The debt settlement companies and affiliates we called while posing as fictitious consumers with large amounts of debt generally follow a business model that calls for advance fees and stopping payments to creditors -- practices that have been identified as abusive and harmful," the report states.

Seventeen out of the 20 companies called by the GAO reported that they collect advance fees before debts are settled, ranging from 10 percent to 18 percent of the outstanding balance. Several companies revealed that monthly payments would go entirely toward fees for up to four months before any money is reserved for settlement with creditors. Only one company said it collects most fees after reducing the consumer's debt.

Nearly all of the companies advised undercover GAO callers they would have to stop paying creditors for the program to work or begin, including accounts the callers said were current. Interestingly, some of these companies are members of trade groups that forbid such instruction to consumers.

Delinquencies can tarnish your credit score and remain on credit reports for up to seven years. Debt settlement itself also leaves a black mark on your credit history.

The GAO also found that some companies exaggerated success rates for their programs -- as high as 100 percent -- or linked their debt settlement services to government programs. The Federal Trade Commission and stage agencies have reported more sobering success rates -- typically less than 10 percent.

The reality is, creditors do not have to accept debt settlement offers and there is no debt reduction program offered by the government.

If you're mired in debt, weigh all debt relief options carefully.

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3 Comments
Pamela Johnston
April 28, 2010 at 10:59 am

April 26, 2010

New Jersey Debt Settlement Firm Says GAO Report is False and Inaccurate

We believe the April 22, 2010 GAO report on debt settlement companies is inaccurate and represents a gross misrepresentation of the facts and cannot be taken seriously in its reference to New Jersey based Web Credit Advisors. Even the GAO's own disclaimer states that the information in the report is unverified. We know. Web Credit Advisors's data shows that the GAO findings pertaining to WCA are not correct, and our data is verifiable where theirs is not. WCA is a bona-fide, reputable debt settlement company, with hundreds of satisfied clients in the short time the company has operated. Web Credit Advisors has undertaken all necessary compliance processes and is a member in good standing of IAPDA – International Association of Professional Debt Arbitrators (associate member) and USOBA – United States Organization of Bankruptcy Alternatives (associate member). We take our reputation seriously and the service we provide to customers with the utmost integrity.

After learning about the GAO Report, WCA held a meeting with the management team and reviewed the GAO report and tape. We were able to recognize the voice of the recorded call in the GAO report. The call came into one of WCA's sales affiliate companies who is highly regarded and follows scripts approved by their management. In the claims made by the GAO pertaining to Web Credit Advisors - one was completely inaccurate. Web Credit Advisors was 100% correct in stating that they have 0 unresolved complaints. We did discover a mistake in the script; the script at that time says we have an A rating with the Better Business Bureau (BBB) when
the actual WCA BBB rating was an A- at the time of the recorded call. We apologize to anyone who feels that we were misstating our stature, and while it is a mistake, the difference between a 90 - 95 and a 95-100 does not match at all with the characterizations made by GAO and subsequent media reports. It is also true that 100% of the people who enter, follow the guidelines and complete the program are helped to settle their debt. Like doctors or a weight loss program, for example, the consumer who does not follow the directions/instructions or take all medication prescribed, should not expect optimum results. In summary, GAO made statements on 3 issues of which WCA contends that 2 were completely inaccurate and the third was blatantly misleading. Web Credit Advisors should be removed from the GAO report and GAO should be held accountable for such damaging and unverified reporting.

BBB History
• From January 2009 to December 21, 2009, Web Credit Advisors had a BBB rating of A-.
• On December 21, 2009, the BBB removed the rating to "no rating" and began revising their evaluation of all debt settlement companies
• According to the BBB the highest rating a debt settlement company could get now is a D- (no matter what) and modified WCA rating to an F
• On February 19th, 2010 WCA resigned from the BBB
• WCA has no unresolved complaints and 2 pending complaints that are in the process of being resolved
• WCA maintained an A- BBB rating until the BBB changed its own standards making a D- the highest possible grade