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Reining in the Debt Settlement Industry

May 11, 2010 - by Donny Shaw

As the financial crisis turned into an economic crisis, people began losing jobs and personal debt exploded, television and radio ads promising to help you settle your debt for a fraction of what you owe have became more and more prevalent. Not surprisingly, the growth of debt-settlement industry is mostly predatory in nature, and in some cases their business models are outright fraudulent.

The companies typically require customers to pay an up-front enrollment fee and then charge between 10 and 30 percent of the customers total debt for their services once/if the debate is cancelled. It has been estimated by the FTC that less than 10% of customers actually ever get their debt reduced by the companies. For the 90% of customers who don’t get their debt reduced, they lose their enrollment fee and go deeper in debt because new fees and interest have accumulated on their accounts (the companies require customers to stop paying their creditors while they try to negotiate a settlement). The Washington Post reported last month about the rise in outright fraud in the industry, with companies asking customers to make deposits into a new account they have access to, and eventually disappear with the customers’ money without ever actually trying to negotiate a settlement

Last week, the Government Accountability Office released a report revealing all kinds of deceptive advertising practices in the industry, from companies that claim to be affiliated with the congressionally-approved bank bailout program to ones that actually display the Social Security Administration and Federal Trade Commission’s official seals on their websites.

Sen. Charles Schumer [D, NY] recently introduced a bill to rein in these companies, called the Debt Settlement Consumer Protection Act. It would create new disclosure requirements in customer contracts, prohibits a number of abusive tactics, limits the fees companies can charge customers, and more.

Here’s how Schumer describes it in a press release:

Specifically it requires debt settlement companies to itemize the services to be provided, list the consumer’s debts, provide a clear and conspicuous list of all fees and compensation to be paid by the consumer to the debt settlement company, and a notices of the consumer’s cancellation and refund rights. It prohibits a debt settlement company from requesting or receiving any debt settlement fee from a consumer until the company has provided the consumer with documentation that a debt has, in fact, been settled, ensures settlement fees are reasonable and commensurate to the actual services provided, and that they cannot exceed specified amounts.  It also provides consumers with the right to cancel a debt settlement contract and receive a full refund of unearned fees. Lastly, the legislation provides for enforcement through the Federal Trade Commission, state Attorneys General, and private rights of action as well as giving the FTC the ability to regulate the advertising and marketing practices of debt settlement companies.

Citizens for Responsibility and Ethics in Washington reports that the debt settlement industry has ramped up its lobbying to stop the bill:

In light of the proposed regulations, the two leading trade associations representing debt settlement firms have made public statements opposing the new rules and hired federal lobbyists for the first time to combat federal attempts to regulate the industry.   The Association of Settlement Companies (TASC), one of the leading trade associations representing debt settlement firms, hired powerhouse Patton Boggs to lobby Congress on their behalf.  In 2009, TASC paid $240,000 in lobbying expenses and an additional $60,000 in the first quarter of 2010.  Prior to hiring federal lobbyists, TASC has taken credit for successfully lobbying 7 states promoting legislation on their behalf and stopping legislation in 7 other states that would have prohibited or banned debt settlement services. The United States Organization of Bankruptcy Alternatives (USOBA), another leading trade association representing the “debt negotiation industry” hired the lobby shop Team Builders.  Team Builders registered to lobby on behalf of USOBA in August of 2009, and has been paid $130,000 to date. (The information on lobbyists was obtained from the Lobbyist Disclosure Act Database, which can be found here.)

It looks to me like the lobbying effort to kill the bill has hit OpenCongress. Right now, it only has a 3% approval rating (1 in favor, 29 opposed), and I’m seeing comments on the bill page that sound suspiciously similar to the line of attack payday lenders are using right now to fight regulation in the financial reform bill — blame the big banks. For example, see this comment from the OpenCongress page:

The regulations proposed are simply an collusive attempt by the banks to persuade the congress to eliminate an avenue for consumers that have fallen prey to many predatory lending practices. This bill would not help, but hurt the very thing they are trying to help. The consumer. One less option for a consumer that has some ability to pay, now may very well be forced into bankruptcy.

Very shady these banks are.

Image used under a CC license from jimalone.

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Comments

  • jadenjones 05/12/2010 1:21am

    It’s true that some cases their business models are outright fraudulent – for example, lately, Oregon has banned Credit Solutions of American from operating at their region. It’s always better that debtors to seek debt settlement with creditors on their own. Here are some do it yourself debt settlement info – http://debtsettlementessentials.com/

  • ShannonSuetos 05/14/2010 7:44am

    I think debt settlement is something that can be very beneficial, but it takes some research on the part of the person looking for the company. Many companies have a bad reputation, but without researching you wouldn’t know it. I have found some good advice on this sites blog about it. http://cloverleads.com/

  • ScottRichard 05/16/2010 10:38pm

    Well, the timing of this bill is just perfect. Since the beginning of the economic downturn, more and more people are finding themselves struggling with debt because of job loss and tanked house price.

    Debt settlement (http://www.debtconsolidationcare.com/debt-settlement.html) industry so far has been largely unregulated. Most of these settlement firms sprang during the current recession with no previous business records for the customers to check their history.

    Hopefully now the customers would have some recourse against fraudulent settlement firms.

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  • zhoramac 08/23/2010 3:00am

    Theoretical data about debt setttlement require additional analysis and facts.

    http://tryfinance.com/3/

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  • CareConnect 02/08/2011 6:34am

    Happy to have found this blog. It will take some time to see how well the new law cleans up the industry. The fact that no fees can be collected up front will make it only attractive for good service providers who wish to back up their claims with good service. If shady operators are looking for ways to stay in this business, they’ll be looking for the exemptions in the ruling.
    The debt settlement industry has been painted as an unethical bunch. Its a shame when this happens as a result of some operators who deliver no service.

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