Debt settlement companies can be very useful tools when it comes to reining in an out-of-control debt spiral. Unfortunately, a number of individuals, some criminal and unethical, others just inept and inefficient, have set up companies that end up making a consumer's debt problems worse rather than better. In this series, WalletPop takes a look at the debt settlement industry, explaining how it works and talking to some of its players. This is the second installment in our debt settlement series.
If you're thinking of working with a debt settlement company to help you reduce the amount of money you owe on credit cards or some other unsecured debt, you should be aware of the new rules instituted this year by the Federal Trade Commission that should, if all goes well, keep consumers from being ripped off.As an industry, debt settlement companies have really exploded in the past decade, and one way they've handsomely profited is by charging consumers hefty fees to help settle their debts. While nobody's saying that a debt settlement company shouldn't make a profit, everyone would agree that if they're going to be paid, they ought to actually do what they say they can do to help you out. And herein lies the problem.
Last year, for instance, then-Attorney General and future governor of New York Andrew Cuomo sued two debt settlement companies in New York. Credit Solutions, he alleged, enrolled 18,000 customers in New York in the past five years but settled the debts of fewer than 2,000 of these clients. Despite their bad track record, they collected fees from all 18,000 customers, earning $17 million in the process.
Cuomo's office also sued Nationwide Asset Services, which signed up 1,981 customers in New York over the course of three years. Its success rate was even worse: According to the lawsuit, only 64 clients completed the program, and 27 clients ended up paying more than they originally owed because of the cost of their debt settlement fees.
Around the country, more and more states have been stepping up, suing debt settlement companies. Earlier this year, North Carolina's attorney general sued Consumer Law Group, alleging that they had collected $2.6 million in illegal fees. Illinois initiated its own lawsuit against several debt settlement companies earlier this year as well. And on and on it goes.
Because what these dishonest debt settlement companies are doing is truly tragic. In 2009, for instance, The New York Times ran a story about a woman who was $25,000 in debt and hired a debt settlement company, only to pay them $4,000 in fees and receive squat in return. Earlier this year, The Baltimore Sun ran a story about Lee Tarver, a 74-year-old retired steelworker who was trying to pay off $40,000 in credit card debt and worked with a Florida debt settlement company to help him out. But aside from paying them $1,400, Tarver had no further contact with -- and no help from -- the company. And ConsumerAffairs.com has an entire website devoted to people who sent in posts from May to August of this year, who said they were ripped off by a company by the name of Debt Free Associates. One of the more typical comments reads: "As of today, I have paid them around $4,200. My savings only has $89. They stole my money and did absolutely nothing for me."
But throughout 2010 and most recently on October 27, 2010, the rules for debt settlement firms changed. The FTC instituted sweeping changes that should go far in protecting consumers from the kind of raw deals they've been tricked into in the past.
No More Upfront Fees. For-profit companies that sell debt relief services can no longer charge upfront fees. They can only charge fees after they get a creditor to agree to reduce what you owe.
One caveat, however: A for-profit debt settlement company can still ask you to put an upfront fee in a dedicated account, which they can then draw from if they get a credit card company or bank to reduce what you owe. But there are new safeguards that protect you from having a debt settlement company take the money if your debt isn't reduced. Also, any interest that accures is yours, and not the debt settlers, and the consumer can also withdraw the funds at any time without penalty, and the financial institution holding the money can't have any affliation with the debt settlement company.
Telling The Truth Upfront. In much the same way that cigarettes are required to have health warnings on their packages, for-profit debt settlement companies are now mandated to disclose certain aspects of their services, including how long it'll take for them to get results for you, how much the fees will cost for this service, and any negative consequences that may occur from using debt services, including the near certainty that your credit score will plunge, and even though, yes, you're doing the right thing by trying to bring down your debt, a lender will most likely now see you as even bigger credit risk.
No Lying Allowed. For-profit debt settlement companies can't misrepresent their services. Sounds pretty logical, but believe me, misrepresenting their services has been a big part of how the "not quite this side of the law" companies have been operating.
So just how well will these rules work to protect consumers? At this point, that's hard to tell. There are still ways to get around these rules, and there's some evidence out there that that's exactly what some debt settlement companies have being doing. Our third installment in the series will cover this subject in more detail.
Read our first installment in this series, Debt Settlement Companies: How to Tell the Good From the Bad
Geoff Williams is a regular contributor to WalletPop and is the co-author of Living Well with Bad Credit.
Debt Settlement Companies: The New Rules That May Keep Them Honest