Debt settlement is basically debt collection by another name. Out of one side of their mouths, debt settlement companies promise creditors they will help them get paid. Out of the other side of their mouths, debt settlement companies promise consumers great “deals” to resolve their debts. In order to appear more effective (or trustworthy, maybe), many debt settlement companies go to great lengths to appear to be law firms, while putting WE ARE NOT YOUR LAWYER disclaimers in the small print to attempt to avoid violating unauthorized practice of law regulations.
At best, consumers spend a lot of money to get settlements they could easily have gotten themselves with a few phone calls. At worst—and far too often—consumers spend a lot of money and get nothing.
The still-new Consumer Financial Protection Bureau is doing a lot of listening, trying to figure out where to focus its energy. Here are the main areas of concern according to Gail Hillebrand (formerly of Consumer Reports, now the CFPB’s Associate Director of Consumer Education and Engagement):
- Debt settlement issues. Consumers who pay for debt settlement services are too often not getting the help they were promised.
- Foreclosures, credit scores, credit reports, and their effect on employment. Advocates in Ohio are worried about the impact foreclosure can have on a homeowner’s credit report and credit score, and how the credit report, in turn, can affect future employment prospects.
- Disputing a credit report error. A Montana attorney reported that his clients frequently have difficulty figuring out how to dispute a credit report error, and they often end up purchasing unnecessary and costly credit monitoring or credit repair services when searching for information online.
- Payday lending. Payday lending operations—including those that operate online and those that target people residing on reservations—continue to be a concern for both communities. One Montana speaker described a client with $1,500 in payday loans whose sole income was $1,600 a month in disability payments.
Minnesota Attorney General (AG) Lori Swanson has sued 6 debt settlement companies on the grounds they were not licensed to do business in Minnesota and overcharged consumers by hundreds of thousands of dollars. She commented:
“People who are swimming in debt are often desperate for a life preserver, but they should know that debt settlement companies usually just anchor them down with even more financial problems . . .”
While it is unclear how the debt settlement companies in the suit operate, many debt settlement companies require monthly payments from consumers. Part of that monthly payment, however, goes towards paying the debt settlement company, and not paying off the actual debt. In addition, many debt settlement companies only make the minimum payments on accounts, and ultimately leave consumers in worse shape at the end of their contract.
Thinking of using a debt settlement firm? Think again. These services don’t help you as much as you think.
Many of these firms are not helping as much as their subscribers think—sometimes at least half of what the customers pay goes to administrative fees—money that is never paid on the customer’s behalf.
The Minnesota Legislature, at the behest of consumer advocate groups, recently passed legislation that regulates what debt settlement firms have to disclose to consumers. The new law also regulates what these companies can charge consumers. But do not let the legislation fool you—these firms are not your best option to get out of debt.
New law tightens rules for debt firms | Star Tribune
(photo: Andres Rueda)
Sam on the dubious value of credit counseling agencies and what to look for when considering referring a client to one.
Bottom line: not really worth it.
For more information about credit counselors and debt settlement agencies, see Debt settlement companies and credit counselors–are they worth the fee?
(Click on the picture for the full article.)
Perhaps some are. But when NetDebt charges “15% of the amount of debt you bring to their program (regardless of results or the number of creditors it must deal with), plus a “small” monthly service fee of $50,” I have to wonder.
So if a consumer had $20,000 in debt, he or she would owe $3,000, paid over no more than 15 months, plus $50 per month. And what do they do for this? Call up the creditor, get their best offer, and collect payments from the consumer. So $250 just for the service, not counting paying off the debt.