New Laws Rock the Debt Settlement World

About the writer: This guest post was written by Garrett Driscoll from Debt Eagle.   Give Garrett a visit if you need help with credit card debt, debt management, or bankruptcy.

Debt Settlement world has been under scrutiny

The debt settlement industry has been under a mountain of scrutiny as the U.S. economy continues to slump. Consumers have been acquiring more debt as job losses rise and often turn to credit cards in order to pay the bills. Recently a flood of television, radio, and internet advertising has poured into the airwaves from debt companies that promise an easy fix for very complicated debt problems. Complaints about these companies to the BBB have grown and many consumers have gotten into serious financial trouble as a result of working with them. The New York Senator Charles Schumer is looking to change this with the 2010 “Debt Settlement Consumer Protection Act“. This act, as a part of the Obama administration’s overhaul of financial laws, should go into action on October 12, 2010. It will serve to fight predatory debt settlement companies that take advantage of this now booming market. Even though the debt industry is a magnet for bad business practices, not all debt settlement companies are predatory (Some even have triple A ratings from the BBB). There are still a good number that want to do good business and try to help their customers. Are these harsh new laws going to wipe out ethical debt companies as well?

Recessions fuel Debt Settlement company business

Companies that provide debt services thrive in a recession. This prosperity has seen many people willing to do bad business, make huge profits and consumers are paying a stiff price. Most debt settlement companies charge large upfront fees and monthly fees to people who can ill afford it. The companies promise that the consumer’s debt will be halved or quartered once it is settled with creditors would be great if it were true.  Unfortunately, many times this big debt reduction never comes. In these cases, debtors may have only bought themselves a bigger financial mess. A debtor can get sued, have wages garnished, or get a lien put on their property if the settlement doesn’t work. Many creditors hate working with settlement companies and may even escalate legal action if they find out you are doing business with one.

Debt Settlement Consumer Protection Act should clear out the riff raff

The only debt companies that will be left standing are the ones that offer “legitimate help”. Bad debt companies often change company names and addresses to avoid complaints and bad reputations, but they can’t hide from these new laws. The Consumer Protection Act has passed, but isn’t being enforced just yet because the debt settlement industry, who is not happy about these regulations,  may try to keep them tied up in court for as long as possible. Once the law is enacted, businesses aren’t allowed to charge any upfront fees and will not be able to take a commission until the debt is actually settled. They also will only be able to take a maximum of 5% of the settled consumer debt (it is currently around %10-30%). If this law is enacted, many of these companies will be out of business. The profit margins just got a whole lot slimmer and not just any fly by night companies will be able to tough it out. Companies who offer real help may continue to function, but the industry just got a whole lot less appealing.

The Act empowers federal and state governments

The “Debt Settlement Consumer Protection Act” also provides powers to the state and federal bodies to crack down on companies that profit on predatory practices. If they are caught violating these laws, the state will have the authority to pursue them. It will also force companies to have an adequate disclosure of all the fees that will be taken. The paperwork will itemize all fees and services a customer will be charged for before they sign up. This will give the debtor a clear, easy to understand, contract that they can mull over before they commit to the service. Settlement companies also will have to disclose that “stopping all payments to a creditor MAY BE RISKY” (this will be tough for them because stopping payments is at the heart of their business model). The act will also give consumers the ability to cancel settlement services for a full refund within 90 days of the signed contract. The refund will exclude any payments that were made to creditors on the debtors behalf.

Could The Debt Settlement Consumer Protection Act kill the entire industry?

Some debt settlement companies believe that this bill is less of a restriction and more of an effort to kill the entire industry. In spite of the many abuses committed in this sector there are still companies with good BBB ratings. So should the FTC be throwing out the baby out with the bathwater? The industry says that with the amount of profit left after the law is enacted isn’t enough to run a sustainable business. A settlement company could only profit around $300 dollars from of a customer with $10k in debt. With the amount of labor involved to run a debt case, this wouldn’t even pay the rent. I have mixed feelings because regulation is definitely needed in the industry, but the act will also put a lot of people out of businesses in a bad economy.

Who are the winners?

With the debt settlement industry on its final legs, consumers will still need help with their debt problems. If the settlement companies can’t find a way to work within the law, credit counseling companies will most likely fill the void. Credit Counseling Services are the winners here, because they have avoided all regulation in the new “Protection Act”. The new laws even give counselors the ability to charge more fees than the settlement companies! Credit counseling services involve working 1-on-1 with a client’s creditors. This fact alone helps avoid alot of the negative issues that arise because of settlement. It could be one reason why they avoided the new regulations to their industry. Credit counseling is much safer, but can still be abused (like anything else). Consumers can be easily taken advantage of in complicated financial transactions (adjustable rate mortgages, debt settlement, etc). Regulation to these industries is good, but the job losses and defunct businesses will always be collateral damage.

Readers: have you used debt settlement companies?  How did it go?  Do you think this new act is needed?   Why?

photo credit: Daquella manera

Tagged as: credit counseling, debt settlement, Debt Settlement Consumer Protection Act