So, you think that guy on TV who says his company will get you out of debt will really help? Guess again.
As few as one in 10 unwary consumers who are lured into so-called "debt settlement" schemes actually end up debt free in the promised period of time, according to a major new consumer alert issued by the nonprofit National Association of Consumer Bankruptcy Attorneys (NACBA). That, the NACBA says, makes these risky schemes the No. 1 threat facing America's most deeply indebted consumers.
Getting in deeper
The alert notes that already struggling with home foreclosures, harsh bank and credit card fees, and other major financial challenges, the 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, TV 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."
Robust industry
The private debt-settlement industry remains robust. More than 500,000 people with approximately $15 billion of debt are currently enrolled in debt settlement programs, according to industry estimates. And there is room for further growth: One in eight U.S. households has more than $10,000 in credit card debt.
"Based on what bankruptcy attorneys are seeing across the nation, we believe that debt settlement schemes are the number one problem facing America's most deeply indebted consumers today," says Durham, NC, bankruptcy attorney Ed Boltz, NACBA Board member and incoming NACBA president. "Bombarded with slick radio and Web advertising falsely promising a smooth road to being debt free in a short period of time, these companies prey on the most desperate victims of the economic downturn. These particularly vulnerable consumers usually end up getting sued, stuck with outrageous fees, more deeply in debt, and far worse off in terms of their credit score."
Earlier this year, NACBA focused national attention on the "student debt bomb," which then was identified as the fastest growing consumer debt problem being handled by consumer bankruptcy attorneys.
Horror stories
"I went with Freedom Debt and ended up getting sued by three of the credit companies," writes Randy of Palm Desert, CA, Â in a ConsumerAffairs post. "It cost me about $900.00 out of pocket. After talking to the companies, they would have worked out a deal with me if I had not used Freedom Debt. It has been the worst experience of my life. I have money to pay my debt, but they will not contact the creditor. You can do it yourself and not have to pay almost $2,000.00 before they say they will start. Save the money and do it yourself."
"They (Debt relief Network) have about $1000 of my money, which they deduct from my bank account; and I cannot reach them," Angela of Guadalupita, NM, tells ConsumerAffairs. "They stopped taking money, but their phone line is a recording and I have been trying to reach them without success. I do not want to be a client anymore, and I want my money back! I am getting ready to get my car repossessed, and my bills are piling up. Creditors call every minute of the day."
Alert highlights
The NACBA consumer alert also notes:
There is now across-the-board agreement on the danger that debt settlement schemes pose to consumers. The Better Business Bureau has designated debt settlement as an "inherently problematic business." 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), the Federal Trade Commission, 41 state attorneys general, consumer and legal services entities, and consumer bankruptcy attorneys have all uncovered substantial evidence of abuses by a wide range of debt settlement companies.
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.
"Self help" may be the best answer for smaller debt burdens. If you have just a single debt that you are having trouble paying (such as a single credit card debt) and you have cash on hand that can be used to settle the debt, you may be able to negotiate favorable settlement terms with the creditor yourself. Creditors typically require anywhere from 25 to 70 percent on the dollar to settle a debt so you will need that much cash for a successful offer. Be sure to get an explicit written document from the creditor spelling out the terms of the debt settlement and relieving you of any future liability. Also be prepared to pay income taxes on any of the forgiven debt.
Red flags
NACBA urges consumers to steer clear of any companies that:
- Make promises that unsecured debts can be paid off for pennies on the dollar. There is no guarantee that any creditor will accept partial payment of a legitimate debt. Your best bet is to contact the creditor directly as soon as you have problems making payments.
- Require substantial monthly service fees and demand payment of a percentage of what they've supposedly saved you. Most debt settlement companies charge hefty fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee-- a percentage of the money you've allegedly saved.
- Tell you to stop making payments or to stop communicating with your creditors. If you stop making payments on a credit card or other debts, expect late fees and interest to be added to the amount you owe each month. If you exceed your credit limit, expect additional fees and charges to be added. Your credit score will also suffer as a result of not making payments.
- Suggest that there is only a small likelihood that you will be sued by creditors. In fact, this is a likely outcome. Signing up with a debt settlement company makes it more likely that creditors will accelerate collection efforts against you. Creditors have the right to sue you to recover the money you owe. And sometimes when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.
- State that they can remove accurate negative information from your credit report. No company or person can remove negative information from your credit report that is accurate and timely.
"Many different kinds of services claim to help people with debt problems," Boltz points out. "The truth is that no single solution works in all cases. Bankruptcy is an option that makes sense for some consumers, but it's not for everyone. For example, the National Association of Consumer Bankruptcy Attorneys and its individual consumer bankruptcy attorney members do not encourage every person who looks at bankruptcy to enter into it. What makes sense for each consumer will depend on their individual circumstances. We encourage everyone to get the facts and do what makes the most sense in their situation."
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