Cash-strapped Families Advised to Recognize Signs of Deceptive Services
The Better Business Bureau (BBB) is warning financially troubled families to beware of debt settlement companies that claim they can easily reduce or eliminate credit card debt. Since the recession, BBB has received more than 3,500 complaints from individuals, including many who paid hundreds of dollars in upfront fees to debt settlement companies but only fell deeper into debt.
“It’s no surprise that the debt settlement industry is flourishing and that’s why we’re raising concerns. Many families are being lured into believing that debt settlement is an easy fix for credit card debt,” said David Polino, Better Business Bureau President. “The truth is that the process often doesn’t work and it has potentially serious negative consequences.”
Consumers have filed complaints with BBB about debt settlement companies since the recession began in late 2007 and they didn’t stop there. Many also expressed their anger to several State Attorneys General across the country. Action has been taken against companies such as Debt Settlement America, Debt Rx USA, Financial Freedom of America, Credit Solutions, Clear Your Debt, Swift Rock Financial Solutions. Consumers in New York have filed complaints against these types of businesses - enough to have the industry come under fire on Capitol Hill.
Senator Charles Schumer (D-NY) introduced the The Debt Settlement Consumer Protection Act last week which seeks to “protect consumers from deceptive, abusive and financially injurious practices rampant in the debt settlement industry.” “Consumers often find these businesses through an advertised 800 number or online,” said Polino. “This is an industry that preys on the vulnerable so it doesn’t matter where the business is located or you are located – the end results are usually poor.” The BBB serving Upstate New York also has debt settlement companies operating in the area and most hold an F rating with the organization.
Typically with debt settlement (also referred to as debt negotiation), the consumer pays an upfront fee to the debt settlement firm with the understanding that the company will try to negotiate a settlement with creditors for less than what is owed – something consumers can do on their own for free. The debt settlement business also works to establish a plan for the consumer to put money into an account administered by the debt settlement company or a third party, and that money is used to pay any negotiated settlements. It usually takes at least six months to a year before there is enough money to start settling accounts. During this time period, consumers will typically not be making payments to creditors. Not only does this put the consumer at risk of having creditors file garnishments or other legal actions, his or her credit rating will likely suffer as a result of not making required monthly payments.
Complainants to BBB allege that instead of having their debt settled as promised, they were driven deeper into debt and sometimes sued by their creditors—which led to mounting legal fees—and had their wages garnished. Some complainants decided after making several months worth of payments that they did not want to proceed with the debt settlement process, but the debt settlement company did not give them their money back which they had set aside—in one case as much as $15,000.
BBB warns families that are drowning in debt to look for three common red flags before considering getting help from a debt settlement firm:
- High upfront fees – Beware of companies that require large upfront fees before any debts are settled. Often, these upfront fees may be better used to reduce a consumer’s overall debt.
- Promises that are too good to be true– Some companies might promise that they can reduce debt by more than half even before looking into the customer’s financial situation.
- Claims that it’s a fast, easy and painless process. - Reducing debt through debt settlement takes time—often years—and can have a significant negative impact on the customer’s credit score. It can also expose consumers to lawsuits and garnishments.
What can a consumer drowning in debt do? BBB recommends that struggling consumers consider the following steps before enlisting the help of a debt settlement company:
- Contact your lender first. – Try to work out an agreement directly with your lenders before enlisting outside help.
- Seek help from a non-profit credit counseling center – Credit counseling centers like Consumer Credit Counseling Services can provide guidance for little or even no cost. You can find a credit counseling center near you at the National Foundation for Credit Counseling, www.nfcc.org.
- Research the debt settlement firm with BBB first. Find out how many complaints it has received, how the firm responded to complaints and whether or not there are any recent government actions or lawsuits against the company.
More advice on managing credit and paying down high balances is available through BBB’s Managing Credit – Made Simpler at www.bbb.org/credit-management/.