Illinois State Treasurer Alexi Giannoulias is asking the state's General Assembly to back legislation that would restrict debt settlement companies that "prey on consumers" sacked with credit card bills and other delinquent accounts.
Giannoulias wants debt settlement firms to be required to acquire a license and prove they are operating within the law. Any proposed legislation would cap fees the companies receive at $50 upfront and $30 per month, although they could collect more money for services rendered based on a percentage saved for the consumer.
Giannoulias also wants to stop these companies from advising consumers to stop paying bills; and require them to provide every consumer with monthly statements detailing how much money was collected and what percentage was used fopr fees and paying down debt.
The recession has led to the fast growth of debt settlement companies nationwide. The firms instruct customers to stop sending payments to creditors and instead pay into a special account controlled by the company. Once enough money accumulates, the company contacts creditors to negotiate a lump sum payoff amounting to less than what is owed.
Because it can take years before a settlement is reached, many debtors drop out of their plans, leaving them in a worse financial situation. If consumers do complete a settlement, they must pay taxes on the amount saved.
"Debt settlement companies claim to be a lifeboat for people drowning in debt," according to Giannoulias. "But their deceptive practices put consumers on a sinking ship toward bankruptcy."