A group of bankruptcy attorneys is warning cash-strapped borrowers against the hazards of working with companies that promise to reduce debt in exchange for a fee.
Consumers should proceed with caution before accepting an offer from a company that promises to negotiate on their behalf with credit card companies and other lenders, according to the National Association of Consumer Bankruptcy Attorneys.
"Unfortunately, most consumers who pursue debt settlement services find themselves facing not relief but even steeper financial losses," the association wrote in an alert published Wednesday.
According to the association, debt-settlement companies often advise clients to stop paying their bills, a move that can result in higher fees, fines and penalties that leave borrowers deeper in debt.
"Debt settlement schemes are a trap for most consumers because inherent in the industry's standard business model is the requirements that clients breach their contractual oblations with creditors," the group added.
The group is advising consumers to avoid companies that promise to pay off unsecured debts at significant discounts, or that charge monthly fees or demand payment of a portion of the amount they promise to save.
The American Fair Credit Council, a trade group that represents debt settlement companies, did not respond immediately to a request for comment. The council has pointed out previously that companies who offer to resolve consumer debts must operate in accordance with rules set by the Federal Trade Commission.
"No debt resolution provide subject to the FTC's rules may (1) promote and market debt resolution programs in a manner inconsistent with the FTC's advertising rules, (2) charge or accept compensation of any sort until a consumer not only has been presented with a settlement but has accepted that settlement and has made at least one payment toward completion of the settlement, and (3) receive, actually or constructively, consumer funds," Robby Birnbaum, the council's president, wrote in a letter last month to Attorney General Eric Holder.
The bankruptcy attorneys' warning follows a string of efforts by regulators to police firms that offer to modify mortgages and other loans. The Federal Trade Commission filed three separate lawsuits last month in Florida, California and Ohio against three alleged scams that offer to relieve borrowers of mortgage burdens.
The Consumer Financial Protection Bureau in August sued a Los Angeles law firm over an alleged debt relief scam. California regulators warned consumers in January to be wary of promises for loan modification.