Already struggling with home foreclosures, harsh bank and credit card fees, and other major financial challenges, America’s most deeply indebted consumers are now falling victim to a major new threat: so-called “debt settlement” schemes that promise to make clients “debt free” in a relatively short period of time. Unfortunately, most consumers who pursue debt settlement services find themselves facing not relief but even steeper financial losses.
Even the industry acknowledges – though not in its ever-present radio and online advertising–that debt settlement schemes fail to work for about two thirds of clients. Federal and state officials put the debt-settlement success rate even lower – at about one in 10 cases – meaning that the vast majority of unwary and uninformed consumers end up with more red ink, not the promised debt-free outcome. Consumers would be better off filing for protection by procuring a bankruptcy attorney in NY.
There is now widespread documentation of the danger that debt settlement schemes pose to consumers. The Better Business Bureau has designated debt settlement as an “inherently problematic business.”1 Similarly, the New York City Department of Consumer Affairs called debt settlement “the single greatest consumer fraud of the year.” Across the country, the U.S. Government Accountability Office (GAO),2 the Federal Trade Commission (FTC), 41 state attorneys general,3 consumer and legal services entities, 4 and consumer bankruptcy attorneys have all uncovered substantial evidence of abuses by a wide range of debt settlement companies.
The debt settlement industry is regulated by state attorneys general and the FTC. Though state laws vary widely in terms of overseeing the industry and its practices, experts agree it is very risky and that consumers should proceed with extreme caution before entering into a contact with a debt settlement company.
Know the Hallmarks of Debt Settlement Traps
Debt settlement companies are for-profit entities that offer to negotiate with creditors to reduce the amounts owed by a debt-strapped consumer. They typically charge steep fees for every settlement they achieve. In some cases they charge very high fees even without obtaining any settlements.
Here are the “red flags” that consumers need to know about when dealing with debt-settlement firms:
- Debt-settlement schemes encourage consumers to default on their debts. Because creditors frequently will not negotiate reduced balances with consumers who are still current on their bills, debt settlement companies often instruct their clients to stop making monthly payments, explaining that they will negotiate a settlement with funds the client has paid in lieu of their monthly debt repayments. Once the client defaults, he or she faces fines, penalties, higher interest rates, and are subjected to increasingly aggressive debt-collection efforts including litigation and wage garnishment. Consequently, consumers often find themselves worse off than when the process of debt settlement began: They are deeper in debt, with their credit scores severely harmed.
- Debt settlement often makes a bad problem even worse. When a consumer defaults on his or her debt, the overall debt burden can rise quickly. As accumulating penalties and interest charges inflate the consumer’s debt-load, creditors begin collection efforts and many eventually sue. This is why debt settlement is always a gamble: If any of the creditors refuse to settle, the consumer is left worse off than when they started.
- The painful bottom line is that most consumers lose the debt settlement gamble. In most cases, the consumer loses the gamble: The debt settlement company is unable to settle with all the consumer’s creditors, so the consumer’s unsettled debts rapidly
If you live in the Poughkeepsie area and you’re experiencing financial problems, contact Dantzman & Dantzman to learn how we can help you achieve a fresh financial start.
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1 The Better Business Bureau provided data to State attorneys general showing that since 2007, debt settlement and debt negotiation companies have annually generated the most complaints received by the Bureau. See Comments of the National Association of Attorneys General to Federal Trade Commission re Telemarketing Sales Rule – Debt Relief Amendments, Matter No. R411001 at n.5 and text (Oct. 23, 2009, available at http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00192.pdf.
2 Debt Settlement: Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers (U.S. Gov’t Accountability Office Rep. No. GAO-10-593T Apr. 22, 2010) [hereinafter U.S. GAO Report], available at http://www.gao.gov/new.items/d10593t.pdf.
3 Comments of National Association of Attorneys General to Federal Trade Commission re Telemarketing Sales Rule – Debt Relief Amendments, Matter No. R4110011 (Oct. 23, 2009), available at http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00192.pdf.
4 Comments of South Brooklyn Legal Services to Federal Trade Commission re Telemarketing Sales Rule Debt Relief Amendments, Matter No. R411001 (Oct. 26, 2009), available at http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00216.pdf; Comments of Consumer Federation of America to Federal Trade Commission re Telemarketing Sales Rule – Debt Relief Amendments, Matter No.R411001 (Oct. 16, 2009), available at http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00161.pdf; Comments of Consumers Union to Federal Trade Commission re Telemarketing Sales Rule – Debt Relief Amendments, Matter No. R411001 (Oct. 9, 2009), available at http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00139.pdf; Comments of Queens Legal Services to Federal Trade Commission re Telemarketing Sales Rule – Debt Relief Amendments, Matter No. R411001 (Oct. 22, 2009), available at http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00185.pdf; Comments of Southeastern Ohio Legal Services to Federal Trade Commission re Telemarketing Sales Rule – Debt Relief Amendments, Matter No. R411001 (Sept. 25, 2009), available at http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00029.pdf.
* Source: http://www.nacba.org/Portals/0/Documents/NACBA%20Docs/NACBA%20debt%20settlement%20trap%20consumer%20alert.pdf