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.