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Senate Takes Steps to Protect Consumers From Debt Settlement Firms

Posted: June 11, 2010

Debt settlement firms, which take exorbitant upfront fees from customers promising they can reduce credit card debts to pennies on the dollar, have been under investigation for advising clients to stop paying bills and overstating their abilities to reduce debts.

Many of these firms were also using the government bailout of troubled banks to lend themselves credibility. At a recent Senate commerce committee meeting, the Government Accountability Office (GAO) introduced audio recordings of debt settlement firm representatives telling clients their companies were “government approved” and linked to the bailout.

The industry defends itself through two associations, the U.S. Organizations for Bankruptcy Alternatives (USOBA) and the Association of Settlement Companies (TASC). These groups claim their members fully disclose the terms of their contracts and are prohibited from telling clients to stop paying bills. The GAO, however, found this is not the case.

Debt settlement firms also routinely claim they are successful in getting credit card companies to accept low settlements in 85 to 100 percent of cases, when the actual success rate is less than 10 percent.

Senator Charles E. Schumer, (D-NY) recently introduced the Debt Settlement Consumer Protection Act to protect debtors from these practices, which can be financially injurious to consumers, putting them deeper in debt and affecting their credit scores. Schumer’s bill ensures debt settlement firms use written contracts disclosing services to be provided, listing the consumer’s debts, all fees and compensation due to the firm, a good faith estimate of the total amount to be paid by the consumer, and cancellation and refund policies.

Paul C. Atkinson, president and CEO of Consumer Credit Counseling Service of Buffalo, Inc, says: “We have seen first hand the horrendous injustices Debt Settlement Companies have created for consumers through their deceptive and dishonest practices.

“Consumers deserve the right to know what they will receive, what they will pay . . . and the expected outcome. Debt Settlement Companies have never delivered on these points . . . now they will be required to conform to sound business practices and standard regulatory supervision.”

The bill also mandates fees cannot be collected until the consumer receives proof the debt has been settled, and limits the fees to be “reasonable and commensurate to services provided.” It will be enforced by the Federal Trade Commission and state Attorneys General, plus it leaves the door open for States to provide additional protection through their own legislation.

Senator Schumer is to be commended for drafting a bill that will put a stop to the deceptive debt settlement advertising currently bombarding debtors.

The current recession has put many responsible people into debt who would normally pay their bills. The first step for anyone feeling overwhelmed by debt or being harassed by creditors should be to contact Consumer Credit Counseling Services, or a reputable law firm.

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