Consumers Face Huge Losses With Debt Settlement Firms

credit card debtConsumers are being warned to exercise extreme caution in dealing with companies that offer to reduce credit card debts. The warning follows a little-noticed rule announced by the Federal Trade Commission which is likely to put many put of these firms out of business in the next few months, but only after they have collected millions of dollars in fees without providing any service.

"There's 9 million customers in these plans who are going to be hung out to dry basically," says consumer advocate Jordan E. Goodman, author of Master Your Debt: Slash Your Monthly Payments and Become Debt Free. "These firms have collected millions of dollars from people and they are going to lose the money; it's just going to be a complete disaster."

Heavy on Ads, Light on Results

Everyone has seen the ads that predominate on the Internet and on late night cable television: We can help you settle your credit card debt for 50 cents on the dollar and you can be debt free in 12 months. Some even invoke President Obama's name and say the administration included the reduction of credit card debt in the 2009 stimulus. But there wasn't any credit card bailout.

By the industry's own accounting, which it made public during hearings on the FTC rule, as few as 30% of consumers ever achieve a settlement of any kind. But they still have to pay thousands of dollars in upfront fees to the debt settlement companies.

In an effort to halt this abuse, the FTC adopted a rule on July 28 that prohibits firms from collecting upfront fees from consumers in debt settlement cases. Instead, they will have to wait until at least a partial settlement is made before collecting their fee. They will also be forced to disclose how long the process will take and the possible negative consequences of using a debt relief service.

But the new rule does not take effect until Oct. 27, and the debt settlement companies are still feverishly advertising their services and may legally continue to collect these fees until the cutoff date.

Goodman says that there is real concern that many firms will simply go bankrupt or close down because their business models depend on getting upfront fees, not waiting three or four years for a settlement.

"These firms can't make it if they are only going to live on success fees and they are going to fold like crazy," Goodman says.

Jenna Keehnen, executive director of the United States Organizations for Bankruptcy Alternatives, a debt settlement trade association, says that 12 of the association's members have already gone out of business in August, two months before the deadline, and "I do expect to lose quite a few more."

Disappearing in a Cloud of Fees

What happens to the consumer when the company goes under? Under the typical contract with debt settlement companies, consumers stop paying their lenders and instead pay into an escrow account for both the fees and the balance on their credit card debt. The escrow accounts are usually at third party institutions, but there is nothing in the current law to prevent a company from closing on Oct. 27 and taking its fees without performing any service.

Andrew Pizor, an attorney with the National Consumer Law Center in Washington, D.C., says that past practice has shown that if there is no settlement, most consumers end up losing their money.

"Most of these firms are not providing much of a valid service and I think they are susceptible to going belly up in the first place," Pizor says "The new rules are forcing companies to either change their models or stop operations so that could cause an increase in that."

Legally, the debt collection firms cannot touch the consumer's money in the escrow accounts except for their fees, but what will happen to those accounts when the firms disappear remains unclear. Goodman says that in the case of Ameridebt, a debt modification firm, tens of thousands of consumers lost their money after the FTC closed the firm down in 2005.

Pizor says the new rule is a major improvement because it prevents a company from taking any fee until they at least partially settle a consumer's debts, which wasn't legally required in the past.

"On the flip side, it's far from perfect because the size of the fee is not tied to the amount saved," Pizor says. "Someone can get the creditor to knock five bucks off the original debt and the debt settlement company can charge you a fortune in fees. Without a definition of settlement or tying the size of the fee to the amount saved there is still room for a lot of abuse."

Many credit experts say consumers would be better off with debt counseling, which helps them restructure their budgets to pay off their debts in full over time without suffering drastic consequences to their credit ratings caused by debt settlement and bankruptcy.

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Another Smoke Screen Law. These Guys Will Not Go Out Of Business. They Will Just Rename Their Services Charge For That, And As A Part Of The sale Will Still Get Their Fee's. Or Thety Will Do A Reverse And Just Become A Gloified Collection Agency. Trust Me The Bill Is Just a Waste Of Time. I Agree With The Last Post You As The consumer Has The Best Chance To Resolve Or Reduce Their Debt.

September 02 2010 at 11:07 PM Report abuse rate up rate down Reply

I think FTC and related consumer advocates have to deal with these fraudulent cases involving unscrupulous debt settlement companies. Anyway, media have been starting to unveil more debt settlement company scams in order to create awareness among credit card debtors so that they would be convinced that these companies able to settle their card debt with the debtors on their behalf. If anyone seriously want to have his credit card debt paid off effectively - it's always seeking a credit card debt settlement and negotiation personally between you and the creditors. For more credit card debt relief tips -

September 02 2010 at 5:18 AM Report abuse -1 rate up rate down Reply

No Comment...

September 02 2010 at 12:02 AM Report abuse rate up rate down Reply

That far back ?!? That far back ??? Cain gave the definition of intent??? He told Able "anything is legal, as long as you don't get caught." Good Grief... Good God! I Yi Yi ...

September 02 2010 at 12:00 AM Report abuse rate up rate down Reply

i read the article from related to a schame that some of thos debt compines are scaming the custermers that sign dept reduction thro this company.The name of the company is http;// Yous Rupert.Hcickman

September 01 2010 at 11:37 PM Report abuse +1 rate up rate down Reply

10,000 little Toads crossing the road in Florida? Slippery when wet. Bed Bugs from Canada in NYC? Hmmm, ok we will hold our ground.

September 01 2010 at 11:24 PM Report abuse rate up rate down Reply

Did a Law Firm try to trick you into sending money to the law firm, when it was supposed to go to the court, Chapter 13? They represent the Credit Card Companies, not you. Be careful out there. Did a Lawyer ever call you up, and wanted 125,000 dollars for a Chapter 7? Did you ever discuss the Statue of Limitations, for Murder 1, with that Lawyer?

September 01 2010 at 11:21 PM Report abuse rate up rate down Reply
1 reply to Paul's comment

wtf are you talking about? stop giving legal advise if you aren't an attorney. Ch. 13 Debtors send their payments to the Ch 13 Trustee who is an attorney and not the Bankruptcy Court. Secondly most lawyers don't drunk dial consumers and want $125,000.00 to file a Chapter 7 Bankruptcy. Finally there are no SOL for Murder in the first degree.

September 02 2010 at 9:30 AM Report abuse rate up rate down Reply

Well just think back to 2006, not too long ago. My guess is Consumers started punting sideways into the stands, in response to the designed calamity. 600 dollars for 14 gallons of gas and the "don't leave home without it" company wouldn't do any thing about it. 400 dollar Hotel hold, on the same card, but another card was used. The "don't leave home with out it" company would not do anything about it. $1,000 dollars of the credit line goes poof. Punted sideways into the stands. It went on and on, and Corporate could get a handle on it. That couldn't meant would not as in won't. So, all of those folks, who circumvented the chain of command, for the money, without regards or concerns, caused the economic melt downs, before the housing mess. Consumers Punting sideways? They walked away and don't expect them back. Rule of Law? FTC? Uniform Commercial Codes? Pay Check was Hijacked by a Bank, that same company charged the Consumer with creating an incident on the Net, for getting ripped big time by a Bank. Punt Sideways and refuse? Now Collection agencies filing charges against you. What a country? Fascist Party Members can design it that way, and there is more to come. Hang on to your chairs, and be careful out there. Trick, Trap, Entrapment, Abuse and Swindle. Who ordered all of that? Word games for the money, be careful out there. Never was the Definition of Capitalism. Your House insurance covers the water pipe in the ground, on your property. So way buy water pipe insurance? If you don't own the apartment building, why buy insurance on the Natural Gas Piping? Why are Tenents, who just moved in, getting charged, for the grease in plumbing trap above. Are you paying two and three times for the same things did in health care? Did your health care forget medical definitions related to your well being? Be careful out there. Did you pay for Health Care for a Relative, and no health care was done, for one year? Wake up America! All of that money moving in and out of markets by bots. It only takes one millionth of second, to get a trade in. Robots running the bank, to bounce your account, for the overdraft fees, and the daily penalties. If you are broke, I guess the penalties will just keep coming. Only if you believe in it. You do not even have to punt. It is their problem. Just stay sober. You can back track the mess all the way back, when a Schalorly President could not come up with the definition, for the Present Tense Verb> IS. Oh, it goes further back? Richard Milhouse Nixon giving the definition for Intent, and showing the entire world how to prosecute him. Because he was no crook. If the Mississippi River Opened up, and both sides of the country fell in, it would not surprise me. Oh shucks...

September 01 2010 at 11:10 PM Report abuse +1 rate up rate down Reply

The late P.T. Barnum of the Barnum and Baily Circus said many years ago, "There is a sucker born every minute in this country." This article talks about 9 million suckers.

September 01 2010 at 9:19 PM Report abuse +1 rate up rate down Reply
Mr. Van Dyke

Wow the good news for the little guy just keeps coming...sad!

September 01 2010 at 7:32 PM Report abuse +1 rate up rate down Reply