The number of debt-settlement companies nationwide has grown into the thousands as more strapped consumers are turning to them to help wipe away debt.
But complaints are also on the rise, with some consumers saying they ended up in worse shape financially after going to a debt settler. Meanwhile, the companies go largely unregulated.
This year, Maryland's General Assembly is expected to take up the matter for the third year in a row. Let's hope the third time is a charm.
Debt settlers promise to settle your debt with a creditor for a lump sum, say 50 cents or less on the dollar of debt owed. Before that happens, you generally make monthly payments to build up the lump sum. Some debt settlers even advise that you ignore your creditors and stop paying debts while you build up the reserve. But collection calls won't stop, and creditors continue to pile on interest and penalties that increase the debt - and consumers often aren't warned of these consequences.
In exchange for negotiating with a creditor, debt settlers charge up to 20 percent of the total debt, according to a new report being released today by the Maryland Consumer Rights Coalition. Many consumers end up paying high fees and then dropping out of the program because they are unable to save enough to settle their debt, the report said. And some consumers complain debt settlers never even contacted creditors.
Complaints are up. Last year, 104 Marylanders complained to state regulators about debt settlers, up from just 15 complaints two years earlier, according to the coalition.
One of those is from Lee Tarver of Baltimore. The 74-year-old retired steelworker amassed about $40,000 in credit card debt early last year and jumped at an offer by a Florida debt settler to get his interest rates cut in half. But Tarver said when he called and wrote seeking an update on his case, he couldn't get any answers. He complained to the Maryland attorney general's office, which also had its letter to the debt settler returned unopened, Tarver says.
Tarver paid $1,200 to the debt settler.
"It's just a scam, and that's about the size of it, really," Tarver says. He's now paying down his cards with the ultimate goal of getting rid of them.
As more desperate consumers turn to debt settlers, Maryland needs to get to the forefront with regulation before more consumers get burned, says Marceline White, executive director of the Maryland Consumer Rights Coalition.
The coalition and the Attorney General's Office are working with legislators to craft a bill that would prohibit debt settlers doing business in Maryland from getting paid until they actually complete a settlement. And even then, advocates say, debt settlers wouldn't be able to collect more than 15 percent of the debt forgiven.
Attorney General Douglas F. Gansler says banning advance fees would weed out illegitimate debt settlers.
Wesley Young, legislative director for The Association for Settlement Companies, says debt settlers provide a valuable service, settling $1 billion worth of debt last year for about $400 million. The trade group supports regulation but opposes bans on advance fees, Young says. A debt settlement can take three years to achieve, and debt settlers can't continue to operate that long without income, he said.
There's no guarantee that legislators will regulate debt settlers this year.
So if you're having trouble paying your bills, contact your creditor as soon as possible. A creditor can offer a more lenient repayment plan. And even some credit card issuers are more willing, on a case-by-case basis, to settle debts directly with overextended customers.
Also, seek help from licensed credit counselors to walk you through your options.