Debt Consolidation and Credit Card Counseling

Debt settlement scams cost consumers millions in fees

The Federal Trade Commission has secured a temporary restraining order that prevents five companies from offering debt settlement services to the public. These companies had promised indebted consumers dramatic savings on their debts, but in fact, produced little for their customers.

These companies, which did business on a nationwide scale, were promising people with problem debt that they could reduce their outstanding debt by up to 60%, including outstanding credit card balances and medical bills. In exchange for this, the companies required payment of a fee in the amount of 15% of the total outstanding debt. If you owed $10,000, they charged $1500, if you owed $50,000, they charged $7500. In exchange for these rather hefty fees, they agreed to negotiate settlements with all of a debtor’s creditors.

• In practice, of course, this did not happen. What did happen was the following:
• Consumers were told not to pay their bills and not to contact their creditors.
• The companies took no action until the consumers paid at least 40% of the fees.
• No discussions were made with creditors before three or four months had elapsed.
• Not all creditors were contacted.
• Those settlements that were negotiated were nowhere near as low as had been promised.

Consumers that enrolled in the programs found themselves facing penalties for failing to pay their bills. They saw interest rates on their accounts raised to significantly higher rates due to failure to pay. They saw their credit scores drop. Many of them were forced into bankruptcy and a few lost their homes to foreclosure.

The FTC has charged the defendants with failing to disclose the significance of failing to pay bills, failing to point out to their customers that they could be sued for failing to pay and failing to note that unpaid debts would continue to accrue interest and penalty fees. They were also cited for misrepresenting the amounts of money that they could save their customers and for lying about how their programs would affect their customers’ credit. Customers had been told that any negative information on their credit reports would be removed after they completed the debt settlement program. This, of course, was not true.

The names of these companies are not important. What is important is that people with problem debt understand that there is no magic solution to paying off their bills. It is possible to settle debts, but the most common solution is a repayment plan or a reduced interest rate. It is difficult, and often impossible, to get a creditor to willing accept 50 cents on the dollar for outstanding debts. They just don’t do it, and any company that promises that they can do it for you is simply looking out for their fees.

Your best bet is to find a reputable credit counseling agency and to discuss your finances with them. They can advise you, for a nominal fee, what your options are and how you can best go about settling your debt honestly and realistically.

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