Consumer Groups Warn About Some Debt Settlement Companies

With the economy and many still looking for work, a higher number of people are seeking relief from creditors.  And more are going to companies that offer to settle their debt, sometimes for pennies on the dollar.

Now six major consumer groups are warning that using debt settlement services often leaves people deeper in debt rather than debt-free. The groups issued a statement saying that debt settlement firms are " aggressively advertising on the radio, television, and the Internet."  

The organizations - Consumer Federation of America (CFA), Consumers Union, National Consumer League, National Consumer Law Center, Consumer Action and Maryland Consumer Rights Coaltion -  are calling on Congress to act quickly to enact S. 3264.  (This is the Debt Settlement Consumer Protection Act of 2010 sponsored by Senators Charles Schumer (D-NY) and Claire McCaskill (D-MO).  The groups also support  H.R. 5387, the companion bill sponsored by Representatives Louis Gutierrez (D-IL), Keith Ellison (D-MN) and Gwen Moore (D-WI).

The consumer groups say the legislation say some people are deeply in debt and desperately looking for solutions, but often end up dealing with deceptive practices and misconduct in the debt-settlement industry.  "The promises that debt settlement companies make are not born out by the facts," says Gail Hillebrand, Financial Services Campaign Manager at Consumers Union.

Information from the consumers groups says a recent Government Accounting Office (GAO) study found the debt settlement companies' claims of success to be "suspiciously high" and "significantly higher than is suggested by evidence obtained by federal and state agencies."

"The industry's own statistics show that debt settlement doesn't eliminate all of the debt for most consumers," says Hillebrand. "Many are left much worse off than they were before."

The groups say that most debt settlement companies claim to help consumers settle debts by paying less than what is owed and that folks who sign up are typically instructed  to pay into a special account until enough money is saved to make a settlement offer to creditors. But experts say the settlement companies often grab hefty fees from the account, and keep the fees even if they never settle the person'sdebts. The fees can range from 14 to 18 percent of the total debt, payable within the first half of the contract. For debts totaling $20,000 to $30,000, the fees would be from $2,800 to as much as $5,400.

 "Desperate people are paying these debt settlement services thousands of dollars with no guarantee that even one penny of their debts will ever be settled," according to Susan Grant, Director of Consumer Protection at CFA. "These people are the least able to afford being ripped off by paying for help and getting nothing in return."

While the fees are being collected, the settlement companies may or may not even be making minimum payments on that consumer's credit cards for example. So interest and late fees pile up on their accounts, their bills may be turned over to collection agencies, their credit reports are damaged, and they may even be sued for nonpayment.
 
The group support the fedederal legislation which they say address the central abuse of the debt settlement industry by eliminating this fee structure and capping the fees at reasonable amounts. The bills would allow a set-up fee of no more than $50 at the beginning of the contract.
There are other provisions and the groups say most importantly, the bills would not allow the settlement fee to be collected until the debt has actually been settled and the debt discharged.

"The Senate and House bills would curb the outrageous fee structures on these services by capping fees and prohibiting debt settlement companies from getting paid until the consumer has proof that a debt has been settled," saus Linda Sherry of Consumer Action. "In addition, fees would be subject to a test that they are reasonable and commensurate to the services actually provided."

 
Marceline White, Executive Director of the Maryland Consumer Rights Coalition, said, "Marylanders have been turning to debt settlement firms for relief but instead have ended up with less money, more debt, a worse credit score and dwindling options. The number of complaints in Maryland has risen 144 percent in just three years. This legislation is a common sense approach which allows the industry to collect fees when they actually perform work. It will provide important protections for consumers across the country."


"It is an outrage that unscrupulous debt settlement companies are allowed to peddle their false promises and take the last dollars from working families that have fallen on hard times," said Sally Greenberg, executive director of the National Consumers League. "In the current economic environment, we can no longer sit idly by while the debt settlement industry rakes in billions at the expense of desperate consumers.  The Debt Settlement Protection Act will reign in the most egregious practices of this industry, and we urge Congress to quickly pass this bill to protect America's vulnerable consumers."