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So-called ‘debt relief’ turns into debt disasters for many

Each year the FTC takes a number of debt relief companies to court.  In 2017 alone, the agency mailed thousands of checks to people who paid for debt relief and ended up further behind due to fees and false claims.

But the checks from the FTC barely made a dent in what the individuals had lost. Scott Laughlin, vice president, Community and Creditor Relations of the nonprofit Consumer Credit Counseling Service of Buffalo, Inc., named the three top local offenders —  Freedom Debt Relief, CareOne, and National Debt Relief.

“We’ve had the most clients come to us after trying to correct their situation through these three for-profit companies. Debt relief or consolidation programs (which are almost all for-profit) claim they can save you thousands,” Laughlin said. “In fact, even if they reduce your debt with your creditors, the fees they charge combined with the interest and late fees that accrue on your debt until it is completely paid off will end up costing you just as much.”

For example, said Christopher J. Grover, attorney, Jeffrey Freedman, PLLC, if a debtor has three credit cards and uses a debt relief company; the company will start taking monthly payments while they negotiate the first debt.  In the meantime, none of the creditors are being paid and interest and penalties continue to mount.  The result is higher settlement amounts for the debts that go months, even years without being paid or settled.

Debt settlement companies make promises they can’t fulfill. Often, the individual may have several debts, but the debt settlement company can only settle a few. Ultimately, the person is going to be sued.  Debtors are never told this by the debt relief company.

“An additional downside,” Laughlin said, “is that the debtor’s credit rating won’t improve because the debt was negotiated down. Whereas, debtors who work with agencies like CCCS get back on track financially and are able to improve their credit ratings.”

Once debtors have contracted with a debt relief firm, all mail regarding their credit cards goes directly to that company, so the clients don’t know the true state of their accounts. And with debt validation companies, Laughlin said, clients pay thousands to have their accounts disputed; with no guarantee the company will get results.

“People who have been involved with debt settlement companies are often relieved at their options under bankruptcy because they are more concrete and final,” Grover said. “We can predict the costs and timeframe for a bankruptcy, where the debt relief industry preys on false hope and hypothetical resolutions.”

Additionally, forgiveness of debt through a debt settlement company is considered income by the IRS. The creditor claiming the loss will send the debtor a 1099, and the difference between what was owed and what has been paid is considered taxable. In consumer bankruptcy, the forgiveness of debt is not considered taxable income.