Getting Out of Trouble
Like crabgrass in spring, debt-settlement firms are spreading fast all over the country. Tempting radio commercials tell you they can negotiate with your credit-card issuer so you’ll pay as little as 40 percent of what you owe. Don’t fall for it. Most debt-settlement companies require you to divert your current payments to a savings account giving them the leverage to negotiate. Meanwhile, your credit is further ruined and they take their fees before negotiating any settlement.
Here’s the catch: they can’t negotiate any lower amount of debt with a credit-card company until they have some leverage — some cash to offer. And most consumers who contact them are so strapped they can barely make the monthly payment. If a consumer does start down this path, the companies take the fees first — as much as 17 percent of the total debt — before starting to talk with creditors. Meanwhile, the late bills, and interest, pile up.
But overwhelmed consumers seem more than willing to grasp at any promise — which is why these scams flourish in tough times. A few debt-settlement companies do not require upfront fees, but only take their cut out of any savings they ultimately negotiated. However, even those companies are not required by law to explain the consequences of this gamble. They tell you that your credit will take less of a hit by making a settlement than by declaring bankruptcy, for example. But that’s a fine distinction, because by the time consumers turn to them with this burden of debt, their credit is already impaired.
Some programs tell the consumer to change the address on the bill or have it forwarded automatically to the settlement company. So the individual never realizes that he or she is being sued by creditors until there’s a notice that their paycheck is being garnished or a lien placed against their property.
Some states are proposing legislation to limit those claims, and limit the strategies that many debt-settlement companies use. For example, in Illinois the legislature is considering a bill, which, while it doesn’t outlaw debt negotiation, limits the damages that unscrupulous firms can inflict on your credit.
Consider clipping its provisions and sending them to your state legislators. Instead of reading about these scams after people are victimized, maybe we could prevent an obvious rip-off that’s happening right in front of our eyes.
The Illinois Debt Settlement Consumer Protection Act:
• Prohibits all upfront and monthly fees, except for a one-time $50 upfront fee.
• Caps fees at 15 percent — which can be charged only on the savings the consumer receives on any settlement, not on the total amount of consumer debt.
• Prohibits debt-settlement companies from telling consumers that they should stop payments to creditors.
• Allows the cancellation of a contract at any time, with prompt refund of fees.
• Requires these companies to be licensed and bonded by the state regulator.
• Prohibits all forms of deceptive advertising and communications.
• Requires certain disclosures, including the fact that your credit rating and credit score are likely to be harmed by this process, and that you may be required to pay taxes on any portion of your debt that is forgiven.
The bill has received wide support locally, from both consumer groups and the banking industry.
It seems everyone but debt-ridden consumers can see the pitfalls of these enticing commercials. Lobbyists for these companies say that crimping their business would cost jobs — a ridiculous point, since most are
based outside the state and the only dollars they spend are on those radio commercials!
Before you try any of these programs, start with a visit to your nearest National Foundation for Credit Counseling office, which you can find by calling 800-388-2227. There, you’ll get responsible, inexpensive advice that will get you out of debt trouble, instead of getting you in deeper.