Recessions such as the one we are currently experiencing provide a fertile market for businesses that prey on consumers who are not financially savvy. Radio, television and the Internet these days are blanketed with advertisements for debt settlement companies trying to snare people suffering under the stress of too much debt. These companies promise to “reduce debt by 40 to 60 percent” or “save (consumers) up to 75 percent.”
Two factors are feeding this trend: Americans binged during the last decade and now owe more on their credit cards than ever before; plus with the deepening recession, their ability to pay continually declines. In early 2009, the consulting firm of Kaulkin Ginsberg estimated the amount of consumer credit at risk of default had risen to $24.5 billion. Yet no matter how serious the situation is, most people prefer to avoid bankruptcy, a factor that makes debt settlement look like an attractive alternative.
There is a big difference between debt settlement and reputable credit counseling agencies such as Consumer Credit Counseling Services and GreenPath. Legitimate credit counseling organizations must obtain certification by a government agency, debt settlement companies are not regulated by the government and only come under government scrutiny when they are investigated or shut down for illegal practices.
In North Carolina, complaints about debt settlement companies doubled last year; in Florida, similar complaints have tripled; and in Oregon, complaints have quadrupled since 2006. Since 2001, the Federal Trade Commission (FTC) has been successful in prosecuting seven cases against debt settlement companies; however, these cases are drains on time and staff, making it difficult for the FTC to pursue the growing numbers of complaints.
In exchange for a fee, which is typically 15 percent of the total amount owed, debt settlement companies tell consumers to stop paying even the minimum on their credit cards and instead make payments into an account at the settlement firm. The debt settlement firm is then supposed to negotiate with creditors to lower the total debt – usually by the advertised 40 percent – and then pay the creditors with the money accumulated in the consumer’s account.
Consumers Lose Control of Direct Dealings with Creditors
While the debt settlement organization is collecting that lump sum, debtors are still subject to late fees and higher interest rates so the debt is much larger by time the settlement company is ready to negotiate the actual settlement. Debtors are also liable for having their debt turned over to a collection agency, garnishment of their wages, and harassing phone calls from creditors. The consumer loses control of the situation because it is the debt settlement agency that is dealing with their creditors; they also don’t realize that any debt discharged outside of a bankruptcy is considered income by the IRS and therefore becomes taxable; or that any partial payment of debt will be reflected on their credit report.
In most cases, creditors are not willing to accept the small amount offered by the debt settlement agency and, if they were, the consumer could easily negotiate this himself and avoid paying the fee charged by the debt settlement agency.
In our experience, clients spend thousands of dollars paying these companies with the result that their financial problems are only increased.
As an attorney who represents debtors in bankruptcy court and sees how people’s financial problems are compounded by these unethical debt settlement companies, I believe the legal community has a responsibility to educate the public regarding scams such as these. Consumers who are over their heads in debt should be encouraged to first consult an attorney and find out their true legal standing before doing anything else. Every so often, we all need to be reminded of the old adage: “If it sounds too good to be true, it is too good to be true.”