Do debt settlement firms help struggling consumers?

Not so much, says a new report from the Center for Responsible Lending.

Despite an advance fee ban the Federal Trade Commission issued back in 2010, “we’re still seeing that consumers have to settle a lot of their debts in order to come out ahead,” says Leslie Parrish, deputy director of research at the Center for Responsible Lending.

Debt settlement firms generally require individuals to default on their debts. As a result, the report argues, a consumer’s debt grows via penalty fees and interest rates. Other risks include potential lawsuits and damage to their credit score.

Parrish also says that, unlike with options such as bankruptcy, creditor negotiations and debt management plans, there’s no guarantee a customer will ultimately receive financial relief.

“You’re hoping they’ll get a settlement on your behalf,” Parrish says, but “many creditors as a general policy will not negotiate with debt settlement companies.”

The report also finds some debt settlement firms are using loose affiliations with law firms to circumvent the FTC’s fee ban.

Robert Linderman, vice president of the Executive Board of the American Fair Credit Council, a debt settlement trade association, says the Center for Responsible Lending’s report takes “a narrow way of looking” at the industry.

He says legitimate debt settlement firms comply with the FTC’s advance fee ban and will only suggest defaulting on debts over alternate options if the customer is poised to or already doing so.

“We accept probably no more than 20 percent of the people who come to us,” Linderman says. “Consumers should have the right to choose.”

Have you ever used a debt settlement company? Were they able to help with your financial woes? Let us know in the comments below.

Follow me on Twitter: @JeanineSko.

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