Millions of Americans are drowning in debt. If you believe the ads — with their bold claims of success — a debt relief company will help you pay off your bills for pennies on the dollar.
The ads are everywhere:
- “Be debt free in as little as 24-48 months!”
- “Erase debts 50 to 70 percent or more!”
- “Legally get debt down to zero.”
It sounds so easy. Consumer advocates and government fraud fighters say it’s nothing like that. They see an industry where deceptive and abusive practices are common.
“These are for-profit companies and they are looking to profit off your vulnerability,” warns Linda Sherry with Consumer Action.
“Desperate consumers are paying thousands of dollars with no guarantee that even one penny of their debts will ever be settled,” says Susan Grant, director of consumer protection at the Consumer Federation of America.
The Federal Trade Commission says people who sign up with debt relief or debt settlement companies often end up with more debt than when they started.
“To be sure, some debt relief services do help consumers reduce their debt loads,” FTC Commissioner Julie Brill told Congress recently. “In too many instances, however, consumers pay hundreds or thousands of dollars for these services but get nothing in return.”
Commercial relief companies are very different from traditional nonprofit credit counseling agencies. While the non-profits work with people to better manage their money and pay off their debts over time, the commercial operators promise to dramatically reduce what you owe.
Also, with a nonprofit counseling service, the monthly fee is normally based on your ability to pay. Most debt relief companies want their money — or a good portion of it — up front. Their fees are often 14 to 18 percent of the total debt.
Debt relief companies often tell their clients to stop paying their bills. Instead, the customer is instructed to pay a certain amount each month into a separate bank account set up by the company. They promise that once there’s enough money in the account, they will negotiate “lump sum” settlements with creditors. During this time, of course, the interest charges and penalty fees keep piling up on those unpaid accounts.
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“You will definitely wind up in worse shape if you are paying your bills and then stop paying them,” warns Gail Hillebrand, a financial services expert at Consumers Union. “Creditors get tired of waiting and they will give your account to a collection agency or sue you.”
The debt relief industry claims the criticism is unjustified. The Association of Settlement Companies says its members saved consumers about $640 million in 2009.
In a recent letter to the FTC, the association’s vice president, Robert Linderman, insisted his industry treats its clients “respectfully and responsibly while producing significant benefits for consumers that far outweigh the cost of realizing those benefits.”
What’s really going on here?
Marceline White, executive director of the Maryland Consumer Rights Coalition, went secret shopping at some online debit relief companies. She tells me she didn’t like what she heard. White says it was obvious the people who claimed to be financial counselors were sales people who just wanted her to sign up on the spot.
“When you ask them direct questions, they don’t really respond with direct answers,” she says. “They follow their script and they tell you things that sound great. They would often tell me that I could cut my debt in half, but they couldn’t give me many detailed specifics about how the program would work or what a fee structure would look like.”
In a report released in April, White concludes: “Instead of getting the promised services, consumers typically end up with less money, more debt, a worse credit score, and dwindling options.”
Earlier this year, the U.S. Government Accountability Office had its investigators call 20 companies posing as potential customers. GAO reports it found “fraudulent, abusive and deceptive practices ... such as claiming unusually high success rates for their programs — as high as 100 percent.” The report notes that FTC and state investigations have typically found that less than 10 percent of the clients successfully complete these programs.
What needs to be done?
Since 2003, the Federal Trade Commission has sued 20 debt relief companies. The settlements in these cases have helped more than 475,000 victims get some of their money back. The FTC says more investigations are underway.
The Federal Trade Commission plans to modify its Telemarketing Sales Rule to protect people who contact debt relief agencies. The proposed rule change would require salespeople to give potential customers more information and prohibit them from making misrepresentations. You would have to be told how long it will take to get relief, how much the service will cost and the company’s true success rate.
Most importantly, the FTC is proposing to prohibit any debt relief service from getting paid up front. They could only charge a fee after the debt was settled as promised.
The industry opposes any attempt to ban advance fees. It claims such a ban would be unfair and would hurt consumers.
My two cents
I hate companies that prey on people who are down on their luck. Debt relief companies promise the moon, but all too often fail to deliver. Of course, clients pay, regardless of the results. That’s just not fair.
If a debt settlement company can provide a real service, then they should get paid. If they can’t do that, they don’t deserve a dime.
I’m hopeful the Federal Trade Commission’s final rule (expected in the next few months) targets the bad apples in this industry and puts them out of business.
Want to get real help?Contact a reputable nonprofit credit counseling agency. Look for one that belongs to the National Foundation for Consumer Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.'
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