Losses Mount as Debt Settlement Firms Face New Rules

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In just a few weeks, new federal regulations will go into effect that will put an end to a particularly unscrupulous kind of debt settlement scam. But amid the countdown to the stricter rules, consumers are already beginning to report the loss of thousands of dollars from supposed escrow accounts that had been set up by debt settlement firms to pay their bills.

Christopher Viale, CEO of a nonprofit called Cambridge Credit Counseling, says "This is probably the biggest consumer harm issue that has ever happened in our country, yet the media has barely covered it at all. It's a shame."

As I wrote in a DailyFinance article on Aug. 31, an estimated 9 million consumers have invested money with these debt settlement companies in hopes of lowering their credit card debts by up to 50%. But as of Oct. 27, a new Federal Trade Commission rule will ban the practice of taking advance fees to arrange settlements, which many fear will cause hundreds of the settlement firms to go out of business, taking the clients' money with them.

"It's already happening," Viale says. "Consumers are calling us to say, 'I was with this company and I called the number and it's disconnected and there is no money in my account now."

State Laws May Help Some Consumers
Fight Back

There is nothing to stop debt settlement firms from taking on new business now, despite the approaching deadline next month and the cable TV airwaves are being saturated with advertising. FTC officials say they will investigate cases of individual fraud, but there is nothing else they can do to prevent settlement companies from stealing consumer money that has been set aside to pay their settlement fees.

Viale says there are a number of steps consumers can take to attempt to safeguard money already deposited with debt settlement firms. First, debt settlement is illegal in 12 states: Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia and Wyoming. If a consumer in one of those states set up a debt settlement account, they can call their state attorney general's office and file a complaint.

Furthermore, many states set caps on the amount that debt settlement companies can charge in fees. To find out what their local regulations allow, consumers should contact the licensing division of the state financial services department to see if they have been overcharged.

Viale says the threat of such an action by the consumer is usually enough to induce debt settlement companies to provide a full refund, because some of the firms fear getting entangled in the courts.

"Consumers are going to need to make a stink to try and get their money back as quickly as they can," Viale says. "Some of the really bad actors out there may be waiting to shut their doors and walk away with the money."

Collecting Thousands in Fees With No Result


Another possible escape for consumers, Viale says, is that if they have been with a debt settlement firm for less than six months and they contact a nonprofit debt management advisor like Cambridge, they can often get their credit card accounts reinstated if the bank involved has not yet sold the account to a collection agency or lawyer. In that way, they can make arrangements to resume paying their bills and avoid the legal problems of not paying their bills.

Nonprofit firms like Cambridge offer honest debt management plans, which take the consumer's credit card debts and wrap them together. The consumer then pays a regular amount plus a small service fee -- usually around $23 a month -- and the debt management firm pays the credit cards off in four to five years. All of the debt gets repaid, but the credit card firms often waive some interest and fees.

In contrast, the for-profit debt settlement firms charge thousands of dollars and are rarely able to convince credit card companies to make settlements. Before the recent FTC ruling, they could still collect thousands of dollars in fees even if they didn't settle the debt.

Viale says the majority of debt-laden consumers don't need a debt management plan, just a tailored household budget that cuts unnecessary spending.

He added that there are a handful of firms among the estimated 2,000 debt settlement companies that provide a legitimate service to consumers and only take a fee after they have successfully negotiated a settlement.

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sthrnfilly

I have never understood how these companies can do business illegally so openly.

September 14 2010 at 2:49 PM Report abuse +2 rate up rate down Reply
svet59

Lets not forget the crooks that sell gold. It's another scam. They don't have enough gold ( that means real gold) RESERVES TO PAY BACK EVERYONE THAT OWNS THESE CERTICICATES. it's another ponzee scheme. If you want to buy gold buy bricks, ozs. Don't buy the "coins" these, you pay 30% more for the mint cost. When you sell, you only get the market price for the metal.

September 14 2010 at 1:14 PM Report abuse rate up rate down Reply
westernmtcpa

It's interesting to see that three of the advertisements that run alongside this article are for debt settlement companies.

September 14 2010 at 1:01 PM Report abuse +1 rate up rate down Reply
dorasofiastudio

CAN WE EXCAPE FROM ALL THE CROOKS. THE US EMBASSEY IS STEALING TAXPAYER MONEY IN IRAQ WITH HALLIBURTON AS THEIR PARTNER, the republicans are trying to steal more taxpayer money to give to the rich,denying tax cuts for the middle class,etc. It's a shame ,but in this country with stagnant WAGES, PEOPLE ARE FORCED TO GO INTO DEBT WITH 22% INTERESt rates. Im glad this is happening to the debt settlement firms, it's about time

September 14 2010 at 12:51 PM Report abuse +1 rate up rate down Reply
mjcurtis7920

WOW STOCKS REALLY HAD A GOOD RUN THIS WEEK TIME FOR A SHORT SALE HIDE YOUR 401K IRA AND PENSIONS..DONT BE A FOOL..THE MOTHMAN IS REAL,,THE MOTHMAN IS ALIVE,,LONG LIVE THE MOTHMAN,,THE MOTHMAN RETURNS..BEWARE OF THE MOTHMAN

September 14 2010 at 12:33 PM Report abuse +1 rate up rate down Reply
LongBeard40

When a man is down kick him ? A man with no money gets pounded , has to pay higher interest rates ! When someone has no money what makes the guy's think they gonna pay more ?

September 14 2010 at 12:23 PM Report abuse +2 rate up rate down Reply
Richard

I love reading some of these comments that are filled with complete stupidity, wrong information,etc., here's the truth, when one idiot takes the advice from another idiot on how to solve his problems, we end up with a solution and plan from 2 idiots, people, don't trust your bonehead brother-in-law to give you good advice, hire someone who knows what they are doing.

September 14 2010 at 12:01 PM Report abuse +1 rate up rate down Reply
Richard

I'm sitting here wondering why if folks in debt can pay these crooks to lower or eliminate their debts, they can't contact their debtors and start paying off what they owe, I guess it's just me and rational, common sense thinking, I apologize!!!

September 14 2010 at 11:54 AM Report abuse +1 rate up rate down Reply
Janny09

Our state of Utah is being pounded by these debt reducer commercials, and shame on Montal Williams, and Arsenio Hall for being in them. Some people are suffering under a load of debt which was procured after having highly paid employment. When the check ends, so does everything else. These companies who know this legislation is about to become law, are stealing money without a gun; preying on helpless families who cannot do their own investigations about these companies. Please go legitimate for your debt consolidation, and check out every company. The commercials you see are the ones who take your money, and then go out of business taking your cash with them. Do you want them buying expensive cars, and houses on your dime? I think not. Do not send your money to these people who advertize on TV, they are proven crooks, and the cable companies take their ad dollars because they are making money off you also. Contact your local state legal aid, and ask about legal procedures for debt collection. Good luck.

September 14 2010 at 11:33 AM Report abuse +1 rate up rate down Reply
cyberlaw70

Mr. Wallace obviously did not do his research and made some grossly incorrect statements. Was he getting paid by Mr. Viale to write this article for his non-profit credit counseling co? Mr. Wallace incorrectly stated that the "for profit" debt settlement co's "rarely" are able to get settlements and charge thousands. Check the facts Mr. Wallace. Even you can call up and make a settlement on your own credit card for 50%. In reality, the average debt settled is in the 30 to 40 percent range of what you owe. As for fees, $23 times 36 months is $828. So you are paying the credit counseling co almost $1,000 over three years. As for non-profit versus for profit, believe me the non-profit employees make excellent salaries (as do the profit). Where do you think that comes from? Your fees paid. Also, Mr. Wallace, why not look into the fraud these non-profit credit counseling co's commit? Fraud is rampant there too. Many corrupt companies claim to be paying your monthly "consolidated" bill to your credit cards and either never pay them or pay them months late. Thus making your credit rating even worse than it was. The reality is that both "settlement" and "consolidation" firms often "forget" to tell you that their services will make your credit rating virtually as bad as bankruptcy. And there is corruption in both the "settlement" and "consolidation" sides of the industry. The reality is the consumer needs to do some research before they pick a company to assist them. And Mr. Wallace needs to embrace the spirit of "objectivity" and check his facts before he writes what basically amounts to an advertisement for Cambridge Credit Counseling!

September 14 2010 at 10:35 AM Report abuse +3 rate up rate down Reply