Debt Settlement Companies: The Still and Ever Present Danger

couple looking worried over debt - debt settlementDebt 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 fourth and final installment in our debt settlement series.In the past year, there have been some major, much-needed changes in the debt settlement industry, ensuring that the ethical companies out there will be even more ethical and fair. But what about the companies that never attempted to be bonafide, reputable, ethical debt settlement companies? Will the rules kill off the sleazy, we-just-want-your-money businesses?

Probably not.

Already, some debt settlement companies have been able to work their way around the new rules. In fact, 12 debt counseling companies issued a letter to the FTC last week, warning the government agency of the ways that the rules are being dodged. (The letter, in its entirety, can be read here.)

How are the rules being avoided? Let's take a look at just a few ways.

Numerous debt settlement companies have formed an "attorney model," the letter charges, in which the debt settlement agency acts as a law firm, which is convenient, since law firms aren't restricted by the FTC regulations for debt settlement companies. But putting themselves forth as lawyers is just theater, really; with many of these debt settlement companies that are posing as law firms, clients never meet a lawyer and the fees are called a "retainer," but doing business with such a firm winds up being just as costly as it used to be before the FTC instituted the new rules.

The way it often worked, as we've outlined in previous stories in this series, is that people would pay hundreds or even thousands of dollars upfront to the debt settlement company. Then the debt settler would work out a deal with the credit card companies or lenders to reduce the amount of money the customer owed. At least, that was the consumer's fervent hope. But because these companies often weren't able to reduce the amount of money owed but kept the client's money anyway, the FTC began to get involved in reforms in the first place.

Mike Croxson, president of CareOne Services, one of the few debt settlement firms with a good reputation, told me he doesn't have any qualms with an attorney settling debts: "Lawyers, for centuries, have done compromise work with creditors on behalf of their clients, so it's not a good argument that they can't do this work," he said. "But I think it's different when a debt settlement company is owned by someone who happens to be a lawyer, and then they say they're not subject to those regulations. That's where the rub is."

Another complaint in the letter to the FTC is that debt settlers aren't allowed to make a pitch via telephone and request money from a consumer to reduce his or her debts. It seems some companies feel they have some wriggle room with this rule if they first text consumers and then get the consumer to call them back. Our advice: If you're a consumer who's received any text messages from a debt settlement company or anyone posing as someone who can reduce your debts, just erase the messages and move on with your life. It's a near certainty they just want to scam you out of whatever money you still have.

Still other debt settlement firms are setting up call centers outside of the U.S., hoping that will protect them from the U.S. government enforcing these new regulations. Other companies have been selling "debt settlement kits," which include books and software, all "at vastly inflated prices," the letter to the FTC stated. This may not be illegal, but it's a predatory practice -- overcharging someone who's vulnerable and anxious about their money problems and is looking for help with their debts. In other words, it runs completely counter to the spirit of what the law is trying to accomplish.

Some experts in the debt reduction industry believe that some debt settlement companies will try to get around the no-upfront-fees rule by creating different fees not currently outlined in the FTC restrictions. Scott Crawford, founder of DebtGoal, a website that, for $14.95, helps people get out of debt by showing them the fastest and most efficient way to pay off their debts, is one such expert.

He says that while upfront service fees for debt settlement firms have either been eradicated completely (if it's a for-profit company) or lowered considerably (if it's a nonprofit), "there is some concern that settlement providers will attempt to offer additional upfront products and services with high fees as a necessary condition to enroll in a program."

So what does all this mean for people searching for help from a debt settlement company? The good news is, debt settlement firms are safer than they've been in the past. But our old advice still applies: If you're going to hire a middleman to help you negotiate with your creditors, you still need to do your homework first and be careful whom you choose to align with. Watch your back, because there are still debt settlers out there that don't care if you lose your shirt.

Interested in reading more from our debt settlement series? Take a look at all three of our previous stories: How to Tell the Good From the Bad, The New Rules That May Keep Them Honest, and How The Process Works.

Geoff Williams frequently writes for WalletPop. He is also the co-author of the book Living Well with Bad Credit.

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