Eileen Ambrose: Study recommends regulating Md. debt settlement industry

Recommendations would cap fees

December 14, 2010|By Eileen Ambrose, The Baltimore Sun

For the fourth year in a row, Maryland legislators will consider regulating debt settlements, and new recommendations in a report out this month might be the charm.

That report, by state regulators with input from consumer advocates and industry players, found that consumer complaints about debt settlers in Maryland have more than quadrupled in the past three years to 95 complaints so far this year. Meanwhile, 39 other states have passed laws related to debt settlement, many of them limiting fees or requiring licensing.

If Maryland legislators adopt the report's recommendations, debt settlers would have to register to do business here and consumers would see a cap on the fees they pay.

In exchange for payment, debt settlers promise to persuade creditors to accept a lump-sum payment that's less than the amount owed. Consumers usually make monthly payments to build up enough cash to offer as a settlement.

Problems arise when debt settlers advise clients to ignore creditors and to stop paying bills, while not warning them that interest and penalties will continue to accumulate and that creditors might sue. Some consumers spend months paying steep fees to debt settlers only to drop out because they can't save enough to offer as a settlement. Many end up in worse financial shape.

In October, the Federal Trade Commission beefed up consumer protections. Debt settlers marketing their services over the phone, for example, cannot charge upfront fees and can only be paid once they reduce a debt.

In Maryland, legislators have tried three times to regulate the industry. Sen. Thomas M. Middleton, chairman of the Finance Committee, says his committee requested a study before the next session begins in January. A balance must be reached to protect consumers while still allowing responsible companies to offer debt settlement to those who need it, says Middleton, a Charles County Democrat.

The report concluded that legislation is needed in Maryland and should include the following:

•Debt settlers doing business here should register with the state. After two years, regulators should consider whether licensing is necessary.

•Fees would be based on the amount of debt initially enrolled in the program — not any additional interest and penalties — and should not exceed 30 percent of the amount forgiven.

•Consumer protections under the new FTC rules, as well as any state law, should extend to debt settlements done online, face-to-face and solely within the state — situations not covered by the federal law.

•The law would not apply to lawyers who do debt settlements as a small part of their practice.

Marceline White, executive director of the Maryland Consumer Rights Coalition, was a member of the group putting the report together. She says she would have liked the final recommendations to cap fees at 15 percent.

"The people you are talking about are cash-strapped," White says. "We feel that as much money should be returned to them as possible."

But David Leuthold, a member of the Association of Settlement Companies, which participated in the study, says his only objection is the recommended fee cap. It might not provide enough money for many debt settlers to operate at a profit, he says.

Sen. Catherine E. Pugh, a Baltimore Democrat who introduced the debt settlement legislation this year, says she expects to do so again next year. She says she's confident a bill will pass next time.

"Sometimes it takes two or three times, sometimes four or five," she says.


When you're buried in debt

•Notify creditors immediately if you're struggling. Many offer lenient repayment plans. After all, creditors would rather receive something than nothing.

•Contact a credit counselor who can help you with budgeting or explain other options, including negotiating concessions with your creditors. Credit counselors offering debt management in Maryland must be licensed. Call the Department of Labor, Licensing and Regulation at 410-230-6100 to find out if a credit counselor is licensed.

•Debt settlers promise to get creditors to accept less than what's owed in exchange for a lump-sum payment. Interest and penalties will continue to grow while you wait for a settlement. In some cases, you might be better off filing for bankruptcy.

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