FTC acts to protect consumers in debt settlement programs

No more advance fees until a debt is settled

August 03, 2010|By Eileen Ambrose, The Baltimore Sun

Companies promising to settle debts for less than you owe soon won't be able to charge for their services until they do their job.

The Federal Trade Commission announced last week that it plans to outlaw advance fees charged by for-profits pitching debt relief services over the telephone beginning Oct. 27. After that, consumers won't have to pay a fee until a debt is reduced.

Also starting next month, debt settlement companies must disclose to prospective clients the cost of the program, how long it will take to get the results promised and any negative consequences of the debt relief program.

"It's a huge victory for consumers," says Marceline White, executive director of the Maryland Consumer Rights Coalition, which advocated for a similar fee ban this year in Maryland.

Until now, the debt settlement industry has grown leaps and bounds without much oversight. An increasing number of consumers have turned to these companies, which claim they can negotiate with creditors to accept half of what's owed or less.

Consumers pay hundreds or thousands of dollars up front to the debt settler. They also must set aside money over many months to build up enough cash to offer a creditor in a settlement. But many consumers don't get through the program and their debts are never settled. Worse yet, some consumers say debt settlers pocket fees and never contact creditors. 

The Better Business Bureau has received more than 3,500 complaints about debt-settlement firms since the recession started. Maryland's consumer protection division fielded 129 complaints last year, or more than four times the number in 2008.

Marylanders mostly complain of high fees, debts that were never settled, continued harassment and lawsuits by creditors, and the inability to get help or refunds from debt settlers, says Steve Sakamoto-Wengel, deputy chief of the consumer division.

Maryland legislators failed this year to bar advance fees, and instead requested a report by year's end on how to regulate the debt-settlement industry here.

White, who will work on the study, says Maryland should pick up where the FTC left off. She wants the report to look into capping debt settler fees that now run 20 percent to 40 percent of the amount saved. And because the new FTC rule deals with telephone sales, White says Maryland law should clarify what happens if debt settlement is done strictly over the Internet.

David Leuthold, executive director of the Association of Settlement Companies, says the FTC went too far and that some debt settlers won't be able to afford to stay in business.

Settling a debt can take many months, and meanwhile debt settlers are serving customer accounts, he says. "We are incurring costs, and we can't get money from it," he says.

Leuthold says some of his membership have experimented with no upfront fees but could only afford to do it on a small scale.

All of this comes too late for Gloria Snowden. The Baltimore claims specialist contacted a credit counseling firm in 2004, seeking to consolidate her debt into one monthly payment to creditors. Instead, she was enrolled in a debt-settlement program.

She says the debt settler took out a few hundred dollars each month from her bank account for four years, money she thought was going to her creditors. But creditors continued hounding her, then started suing her to collect.

She complained to the debt settler — even visiting its offices three times — and each time staffers promised to fix the problem. Then, Snowden says, the Maryland attorney general's office contacted her to say the debt settler wasn't legitimate.

State regulators won in court a judgment of more than $2.7 million against the debt settler, but have only collected about $200,000. Snowden hasn't seen a penny. She filed for bankruptcy.

"I lost a lot of money. But you see, I trust people," the 65-year-old says.

The FTC's action should prevent more cases like this.


Deep in Debt?

Contact creditors at the first hint of trouble to ask if they can work out a repayment plan or settlement with you.

Seek the help of a licensed credit counselor in Maryland to explore your options, such as budgeting, debt management or bankruptcy. Call the state at 410-230-6155 to check if a counselor is licensed.

The Better Business Bureau advises that debt settlement should be the last step before bankruptcy. First check BBB.org to view any complaints or actions against a debt settler.

If you choose debt settlement, wait until the FTC's new rules take effect in October.

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