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BEWARE - Debt Settlement Arrangements

It’s hard not to come across an advertisement for a debt settlement company.  They are everywhere.  I like the one that implies that there is a government stimulus program that helps us with our credit card debt (there isn’t one).  These debt settlement arrangements are highly susceptible to fraud and may not be all that effective.  Beware.

With many Americans loaded with debt (as high as $20,000 to $30,000) these debt settlement companies have flourished with promises of salvation from credit card debt.  A recently released report by the Center for Responsible Lending provides some evidence that debt settlement services may not be very effective.  This report was released just as the Federal Trade Commission prepares to possibly ban huge upfront fees that debt service companies require. 

The CRL report indicates one major flaw with the debt settlement companies’ business model is the requirement of huge upfront fees and monthly fees that often put the consumer in worst position:

facing increased debt, higher risk of (or actual) bankruptcy, ruined creditworthiness, heightened collections efforts and even lawsuits.

Of course the debt settlement trade group is lobbying for legislation that would allow them to collect huge fees regardless if they deliver results. 

As for the effectiveness of debt settlement services the report stated the following:

An industry study (reported in letter to FTC):

• 65.6% of those enrolled had terminated before completion.
 
• 24.6% of consumers had completed the program (defined as at least 70% of debt settled).
 
• 9.8% of consumers were still actively enrolled.
 
• Settlement savings versus fees shows fees were a hefty 51% of savings (not taking into account increased fees/interest on other accounts, and other harms).

Richard A. Briesch “Study” of one debt settlement company (Aug. 6, 2009):

• 60% of those enrolled (~2,700 consumers) cancelled within two years (higher rate 64.5% for those with the most debt).
 
• These consumers alone paid at least $1.3 million in set-up fees.
 
• For the 40% who did not cancel, detail is provided about the size and frequency of offers and settlements only for those consumers who had at least one settlement or offer of settlement (without disclosing the size of this group, or how many consumers had no settlements or offers at all).       o After one to two years of paying fees, even those consumers who had at least one debt settled still owed money on 48% of the enrolled accounts and still owed 46% of the total debt enrolled     (plus whatever amount that debt had grown to during the interim).

Colorado AG Data (Oct. 15, 2009):

• More than 50% of consumers who had signed up in 2006 or 2007 had already terminated as of Dec. 31, 2008.
 
• Only 7.81% of those who had enrolled 2-3 years earlier (in 2006) had completed the program.
 
• Less than 10% of total enrollees had completed the programs.
 
• Enrollees had already paid an average of $1,666.

Judgment (Court Findings) Against Nationwide Asset Services, Inc.:

• 1,981 consumers were defrauded.
 
• Only 1/3 of 1% of enrollees received promised savings (25-40% debt reduction).
 
• 180 consumers who completed the program paid more in fees and settlements than the amounts they saved.

 
FTC Case Against National Consumer Council, Inc. (2004):
   

• Only 1.4% of consumers enrolled in a debt settlement plan obtained the promised results.

Florida Complaint Against Nationwide Asset Services, Inc. and Others:
 

• Alleged that 227 Floridians had enrolled over six years, but only 30 of those consumers completed the program, which is a completion rate of less than 13.5%.

FTC Case Against Debt Solutions, Inc. (2006):
 

• Alleged that Defendants failed to achieve promised interest rate reductions for 99.5% of sample of accounts and failed to achieve any interest rate reductions in 80.4 percent of the accounts.

First, we must understand all of our options before signing up with a debt settlement company.  This does mean seeking legal advice, if possible, or debt counseling advice.  U.S. Department of Housing and Urban Development (HUD) does have a list of approved counseling agencies - some do provide credit card debt counseling.  Second, if our only option is debt settlement - research, research, research - make sure there are no complaints filed against company by checking with state agencies such as state attorney general office or other consumer protection agencies and the Better Business Bureau.  Third, before signing anything, make sure that you read and understand all documents that debt settlement company wants signed - particularly check for fees and any promises offered are included in the documents.  Please do not sign something if you don’t understand it.

Good luck.