Few Consumers Complete Debt Settlement Programs-Although it is difficult to get information from these outfits as to their customers success rate, the information we do have is not encouraging. It appears that very few people who use these companies are successful according to The National Consumer Law Center study on these companies in 2005. (Referred to here as “the Law Center Study”). In one of the largest enforcement actions taken by the FTC involving a company called the National Consumer Counsel, the court appointed a receiver to look into the company's books. What the receiver learned was disturbing. He found that a mere 1.4% of those who entered the program actually completed it. That means that 98.6% failed! Forty three percent (43%) of the company's customers cancelled from the program after the company took as fees 64% of what they paid.

Philip Lehman, an assistant attorney general in North Carolina that has prosecuted some of these companies “estimates that 80% of consumers drop out of debt-settlement programs within the first year.” (See Look Out for That Lifeline,DEBT-SETTLEMENT FIRMS ARE DOING A BOOMING BUSINESS-AND DRAWING THE ATTENTION OF PROSECUTORS AND REGULATORS, Business Week, March 6, 2008).

People facing a financial crisis need the assistance of trained professionals, not sales pitches from telemarketers. Analyzing a person's financial condition involves making legal judgments that can not be made by non-lawyers. Taking advise from untrained sales people is very dangerous.

Often a Substantial Portion of the First Payments Goes to Fees, Not to Creditors- The “secret” that debt settlement companies often don't tell their customers is that a substantial portion of the money that is first paid goes in to the companies pockets, not to creditors. In our firm's experience, we have counseled many clients who all tell us the same thing. They paid monthly payments for several months and nothing happened. The creditors still called and no money was being paid to creditors. When they asked where the money was going, they learned it was being applied to fees. They often then withdrew from the program and came to see us.

In his testimony before the Senate Committee, Mr. Plunkett testified that debt settlement companies “charge such high fees that consumers often don't end up saving much to make settlement offers, which is why so many drop out.” He also indicated that it “is often not made clear to consumers that a hefty portion of the payments they make in the first year will go to the firm, not to their reserve fund or creditors.”
The Law Center Study found that “the debt settlement companies gouge consumers with high administrative and up-front fees so that their monthly payments to the 'reserve' account build up slowly at best.”

They Are Not Lawyers and So They Are Unable to Advise You on Your Legal Rights- People facing a financial crisis need the assistance of trained professionals, not sales pitches from telemarketers. Analyzing a person's financial condition involves making legal judgments that can not be made by non-lawyers. Taking advise from untrained sales people is very dangerous.

In these programs the consumers stop making their payments to their creditors. Obviously, the creditors begin to pursue the consumers. Many of the consumer's rights under state and federal law now come in to play. For example, the Fair Debt Collection Practices Act, where applicable, governs what debt collectors can and can not do. Some companies take various stabs at advising their customers about this law. The advise is often flawed. The Law Center Study found that “the debt settlement companies focus almost exclusively on the fair debt laws, which do not apply in all cases. In addition, even if collection calls are stopped, debtors can still be sued.” Taking legal advice from these outfits is like taking medical advice from your local grocer.

They Cannot Protect You From Creditor Harassment- We've all heard the commercials that promise to put an end to all the creditor calls. Here is the truth, however. These companies are not attorneys. You are not filing any court proceeding. You are not receiving any protection of a court. There is nothing these outfits can do to protect you from your creditors that you yourself couldn't do. No matter what they say, they are powerless to protect you.

The Law Center Study found that “many companies do not follow through. Some simply give the consumer a packet of information that includes a cease communication letter. The consumer is on his own. Others provide limited assistance, but in fact, are not much help when serious trouble occurs.”

Part of providing quality services to people in financial distress, is being able to provide real protection from creditor collection. Debt settlement companies just can't offer this service. Advising people to stop paying their bills, and then telling them that they're on their own when the debt collectors come calling, is just wrong.

The Way the Companies Business Is Structured Is Harmful to Vulnerable Customers- The Law Center Study concluded that the way these companies do business “is inherently harmful to consumers.” William Binzel, Executive Vice President and General Counsel for the National Foundation for Credit Counseling put it this way:

They Charge Exorbitant Fees and Are Secretive. Collect huge up-front fees before providing any services. Provide little or nothing in the way of financial counseling or education. Require monthly payments from the consumer. Deduct a service charge but make no payments to the creditor on behalf of the consumer. Hold the consumer’s money for months and months until there’s enough money in the account to offer a settlement to one creditor and then start the process all over.

What does the consumer get out of this deal? The consumer gets to pay exorbitant fees and monthly payments. He gets little or no disclosures. He gets little or nothing in the way of professional services. He has virtually no ability to cancel the agreement. His debts get bigger and bigger as they amass more interest and late charges. He’s the subject to legal collection efforts, including litigation, judgments, garnishment of wages. His credit history is trashed. And at the end of the day, he gets a bill from the IRS for tax liability.

They Charge Exorbitant Fees and Secretive- The Law Center Study found that “debt settlement fees are so high that consumers don't end up saving as much.” The Consumer Federation of America, the National Consumer Law Center and U.S. PIRG agree. Our requests for information from the United States Organizations for Bankruptcy Alternatives (USOBA) were initially ignored and we did not receive any information in time to use for this report. In addition, many debt settlement companies we called would not share information about their business. This reluctance to provide information should be seen as a huge warning sign.

The study concluded that “unfortunately and quite tellingly, the companies we contacted were reluctant to discuss their fee structures.” John Ansbach, General Counsel for EFA Data said: This is not a very transparent industry. For example, you go on almost any website for a settlement firm and you can’t find a simple explanation of what will be charged in general based on whatever, say a fee schedule.

The Value of their Service is Questionable- Mr. Plunkett of the Consumer Federation of America, at a recent FTC Seminar stated that “it really is unclear what professional services most debt companies offer to assist debtors while they save for settlement. Once again, this long tail line, this long delay, we see complaint after complaint from consumers that their feeling is that absolutely nothing happens for a very long period of time while the consumer accumulates enough money to offer a settlement. And the settlement firms really haven’t been clear at all about whether they’re offering a service during that period. . .But the first thing to consider is that there is really no service that’s being offered until there is a settlement.”

Some Major Creditors Refuse to Work with These Companies- Many of these outfits claim that they have some special relationship with creditors. What they don’t tell you, however, is that some creditors refuse to work with them. Bank of America, Discover and American Express each have a policy of refusing to negotiate with any debt settlement companies.

They Often Make False Claims and Misrepresentations- What consumers need most is accurate information. The federal and state governments have prosecuted many of these schemes, and the prosecutions usually involve some fraud or misrepresentation. The most common misrepresentations are as follows:

1. Misrepresentations about the amount of fees and how they are paid.

2. Claims that the companies can protect the consumers from their creditors.

3. Claims that the companies have some special relationship with creditors.

4. Guarantees that debt can be settled for a specific amount.

5. Promises that the consumer’s money would go to creditors.

6. Promises of counseling services never provided.

7. Statements that documents that were used to take money from the consumer’s
bank accounts were “not contracts” but “just information.”

8. Failure to tell the consumers that they could be sued.

Many Companies Are Breaking Existing Laws-The Law Center Study found that “one of the most troubling sides to this industry is that many companies violate state and federal consumer protection laws.” This may be why we see so many enforcement actions by the regulators.

Many Companies Are Engaged in the Unauthorized Practice of Law-When these companies advise their customers on how to deal with their creditors, the cross the line into the unauthorized practice of law. The Law Center Study found this in its investigation.

Seven States Outlaw Debt Settlement Companies- Concerned with the harm that these companies inflict on people, seven states have outlawed them altogether. (Arkansas, Hawaii, Kentucky, New Mexico, Tennessee and Wyoming) Iowa is considering a similar law. The Attorneys General in the states are overwhelmed with trying to prosecute these schemes. Norman Googel, an assistant attorney general in West Virginia recently said that “there are more of these firms than we can handle. They are truly exploiting a group of consumers already in crisis.”

They Are Often the Subject of FTC and Attorney General Enforcement Actions- A brief review of the FTC website will show a number of enforcement actions against these schemes. Typically, the FTC will commence legal action to shut these outfits down and impose penalties on their owners. The Attorneys General of the states are also involved in bringing these legal actions.

Some Companies Are Scams- Unfortunately, there is always someone out there to take advantage of people in crisis. Some of these companies are just scams. They'll take your money and do nothing. The problem for the consumer is how to spot the scams. All these companies have professional looking websites with pictures of smiling people. How do you know which one is a scam? You don't. Maybe you pick a scam, maybe you don't.

You Are Not Consulting with a Licensed Professional. You Are Talking to a Telemarketer- Professional credit counselors and attorneys have been around for a very long time. They are regulated and licensed. They have to have required training. These “companies” are brand new. The people you talk to over the phone are not trained professionals, they're telemarketers! If you're experiencing one of the largest crisis of your life, you need to sit down, face to face, with an experienced professional, not some salesman from a distant state.

They Are Not Licensed, Regulated or Accountable to Anyone- Credit counselors and attorneys are accountable to the agencies that license them. The telemarketers are not accountable to anyone. Credit counselors and attorneys have rigorous training. The person you're talking to at one of these companies may have been selling TV's at Best Buy last week.

The Consequences of Their Programs Are Often Not Disclosed- These outfits often fail to disclose the various consequences associated with their programs. For example, the Law Center Study found that “debtors are rarely told that if their creditors accept a negotiated settlement, the amount forgiven may be reported as taxable income.” Many consumers who get sold on these programs don't know that they could be sued, that their credit is damaged and that the amount of the debt increases. When the process server comes knocking at the door, the only thing these companies often say is that there is nothing they can do.

Get the real facts and know your options. There is a solution for you.

*Selbach Law Firm issues Press Release praising Attorney General Cuomo for his investigation of debt settlement companies. View the Release

*NY Attorney General Creates Website About Consumer Fraud & Debt Settlement Companies at www.nydebthelp.com

 

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*Under federal law we are considered to be a debt relief agency. We help people file for bankruptcy relief under the bankruptcy code.