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Regulators are trying to shut down Mission Settlement Agency in New York and Premier Consultant Group in New Jersey, alleging they charged millions of dollars in unnecessary fees.
May 7 -
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.
October 18 -
The Consumer Financial Protection Bureau is considering new rules to govern debt collection practices that could for the first time include banks and other creditors that are collecting their own debt.
November 6
Be debt-free in 36 months!
Reduce your debt by up to 50%!
Weve all heard commercials from debt settlement companies that use pitches like these, promising troubled borrowers that they can get out of debt by paying just a fraction of what they owe. The industry that the New York City Department of Consumer Affairs once called the top fraud of the year is now fighting hard to set up shop in additional states across the country. While several statessuch as New Jersey, New Mexico, Arkansas and Wyoming do not currently authorize debt settlement, industry lobbyists have been making the rounds in state capitals trying to rustle up support to allow the practice.
But it may be in consumers best interest to keep debt settlement companies at bay. A
Debt settlement seems like a viable alternative for families struggling to break free from excessive debt. Enlisting the services of a professional to negotiate down debts appears equivalent to hiring a lawyer to deal with complex legal proceedings.
But theres a catch. In order to sign up for debt settlement, clients must first default on all of their debts. The money they once spent on minimum credit card or other debt payments is then instead used to fund a special account that can eventually be used for settlements.
In some cases, creditors simply refuse to negotiate with debt settlement firms. Clients face the significant risk that creditors may instead sue them to collect on these defaulted debts. For example, a Maryland regulator found that
These drawbacks led the Federal Trade Commission in 2010 to bar debt settlement companies from charging fees until they had settled at least one debt on behalf of their clients. But the CRL report shows that while this regulation may have led to some improvements in business practices, serious risks remain for debt settlement clients.
A debt settlement company would have to settle at least two-thirds of a clients debt in order for her to emerge better off from the process than when she started, according to the CRLs analysis of data published by the industry trade association, the American Fair Credit Council. If the potential tax liability on settled debts and the monthly cost of maintaining a special account for settlements are considered, a debt settlement company would have to settle over 80% of a clients debts for the savings to exceed the costs of the settlement process.
Historically, only a small portion of clients have achieved such successful outcomes. In 2010, the industry reported that
More recently, the Colorado Attorney General reported that
While there are exceptions, its clear that debt settlement is inherently risky for financially vulnerable families, potentially leaving many people much worse off than they were in the first place.
Any state should think twice before offering a welcome mat to the industryunless and until debt settlement companies can show that clients typically settle enough debt to actually benefit from these programs.
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