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New bill aims at debt settlement

By Leslie McFadden · Bankrate.com
Thursday, April 29, 2010
Posted: 1 pm ET

Washington has taken aim at the debt settlement industry. On Wednesday, U.S. Senators Chuck Schumer, D-N.Y., and Claire McCaskill, D-Mo., introduced the "Debt Settlement Consumer Protection Act," which would limit the fees that debt settlement firms can charge and mandate written disclosures before services are performed, including the right to cancel for a full refund.

Enrollment in a debt settlement program usually involves making payments into an account administered by the firm, which uses some of the money for fees but also to negotiate a settlement with creditors when the account has enough funds for an offer. Meanwhile, many companies advise consumers to stop paying their creditors to make the lenders desperate even for a partial payment.

As our Debt Adviser Steve Bucci points out in his column, this approach will leave you with a ruined credit score and possibly a court summons. A single 30-day late payment can lower a 780 FICO score by 90 to 110 points, according to the Minneapolis-based score developer.

According to a press release from the Council of Better Business Bureaus, BBBs across the nation have received more than 3,500 complaints about debt reduction companies since the start of the recession in 2007. Some consumers complained that the debt settlement programs not only didn't work, but lead to increased debt and in some cases, a lawsuit from creditors and wage garnishment. A number of consumers who quit the program say they were not refunded for payments they had made.

The bill comes after a hearing last week during which the U.S. Government Accountability Office testified about the results of a covert investigation into the industry's practices. It found that most companies it mystery shopped charged an upfront fee before any services were performed, and nearly all of them told the undercover callers to stop paying their creditors. In some cases, a consumer's payments into the program would go entirely toward fees for up to four months.

Debt settlement can be a legitimate path to get out of debt, but it should be a last resort. The Federal Trade Commission explains the pros and cons of various debt relief options in this fact sheet, "Knee Deep in Debt."

The BBB warns of the following red flags for unscrupulous debt settlement companies:

  • High upfront fees.
  • Guarantees of debt reduction by specific amounts.
  • Claims that the process will be swift or easy.

Have you ever settled a debt? Did you do it alone or work with a company?

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5 Comments
Keave
May 19, 2010 at 7:48 pm

This legislation is a joke. We need more legislation and tighter financial measures against credit card companies. In the last 5 years banks have tried to crush the American Dream and the middle class. America is turning into old world France were the rich enjoy all the benefits and the poor pay for them. The right debt settlement company can prevent the debtitor from turning to bankruptcy. And save a debitor on average 42%. Credit
Card practices should be illegal !

Debt Solutions
May 17, 2010 at 9:13 pm

Here we go again. Credit card companies trying to lobby two Democrats (one my favorite...guess who) to squeeze every last buck out of families with legimitate hardships. The companies are virtually legal loan sharks, who are only concerned about the next yacht they can buy and the stock of thier companies. They just got hit last week with caps on how much they can charge in ATM fees so here is a way to make it up. If this goes through I would tell everyone to file for bankruptcy so they never get a dime!

John w.
May 13, 2010 at 3:03 pm

I agree that a messure of regulation needs to take place. However a braod sweep of the industry will remove some of the bad apples and also hurt the good companies. I think this is a plot by the banks to corner the consumer into a no way out situation. We all know The banks do not want to work with the consumer, nor do they want you out of debt. The outrageous fees and interest charged on these accounts leave a consumer without choices, especially if they lost their income. Debt settlement is needed! Have you ever received a collections call? who is going to deal with that. I say change the way the Banking idustry does business, so that none of this need take place.

JoeAndy
May 04, 2010 at 7:27 pm

I am a debt settlement negotiator, i work all day to help people out of card debt, this new law will not regulate anything, it will 100% stop companies from offering their profession to the public. There are bad companies, absolutly - yes, but there are great companies like mine who settle out millions of dollars in card debt for families every month, our fee's are very low and are paid in small amounts through out the program. The hardest part are these laws, hardnose banks, and polititions who DONT give the consumers a break, if this passes, people are going to be up against a wall, then what will they do with 30% interest rates, a balance they will never pay off, and a creditor reducing thier available balance to keep them in debt forever while hurting the credit JUST AS BAD as a person that is late. We are going to have problems if Debt Settlement is stopped!

Timcooklaw
April 29, 2010 at 3:55 pm

I can see where regulation needs to occur. As a bankruptcy attorney, I usually have to deal with the fallout when the debt settlement plan fails. With debt settlement you are trying to keep the creditor at bay until your client has enough money deposited with you to settle the account. The creditor has to make a choice between waiting around to see if they get a settlement or simply filing suit against the cardholder and taking their chances. As the NY Times reported more and more of the card companies are simply filing suit instead of trying to work something out in 6 months. There is no magic deal the DS company has to stop the creditor from filing suit. The state courts are overwhelmed with these collection lawsuits. If the debt settlement firm is collecting an upfront fee from the client before settling, the client may be sitting there with one or two lawsuits going on before the first settlement ever takes place. If they don't defend against the lawsuit, the client gets a default judgment against them very quickly, which the card company can then use to garnish wages or bank accounts. So the debt settlement plan collapes into the earth under the weight of their client now with a judgment and being garnished. There are some good debt settlement companies out there who don't charge a fee until the account is settled. It is strange that the card companies will not listen to settlement unless you are two or three months behind. The other practice that I notice in talking with clients is that several of these 800 number settlement companies are just a referral service to a debt settlement company that the client has never heard of. They thought they were group A but someone in Group B is actually handling their plan. One area they could be effective with is the group of families that cannot afford to file a chapter 13 bankruptcy. With the 2005 amendments BAPCPA Congress actually made it impossible for some households to even afford to file a chapter 13 bankruptcy. With the means testing determing how much the family can pay to unsecured creditors. In addition, you have the factor that above median income households must complete a 5 year repayment plan in Chapter 13 which is why over half of them fail and a lot of people simply don't want to be tied up that long. At least twice a month, I meet with families who tell me that the chapter 13 plan payment is more than the monthly payments on their credit cards currently are or that they cannot cut their household expenses enough to make the chapter 13 payment. Their only option is to deal with the card companies themselves or try debt settlement. So you sent them off to consumer credit counseling or debt settlement companies as an option. If the judgments against you are stacking up then your only option really is bankruptcy because bankruptcy is set up to get rid of debt and the judgments effectively.