Debt-Relief Firms Attract Complaints

[question everything]

OCTOBER 14, 2008

Debt-Relief Firms Attract Complaints
By ELEANOR LAISE
The Wall St. Journal


Wally Bowman, a part-time security guard in Miamisburg, Ohio, had roughly $15,000 in credit-card debt when he signed up with a "debt settlement" firm last year. The company said it could resolve his debts for far less than the amount he owed and advised the 63-year-old to stop making payments to his creditors, according to Mr. Bowman. Mr. Bowman paid hundreds of dollars in up-front fees and made regular monthly payments of $249 to Hess Kennedy, but the Coral Springs, Fla., firm never settled any of his debts, he says. By the time he dropped out of the program this summer, Mr. Bowman says, his debt had ballooned to about $20,000, due to interest and late fees, and creditors were threatening to garnish his wages. Finally, he filed for bankruptcy last month. "I wish I had done that to begin with," Mr. Bowman says. "I'd have been much better off."

As the economy weakens, a growing number of consumers are paying big money for services from debt-settlement companies that purport to help them settle their debts for a fraction of what they owe. But as Mr. Bowman's experience shows, customers can end up wishing they hadn't sought such help. At financial-services Web site Credit.com, the number of complaints about debt-settlement companies received so far this year is already double the number received in all of 2007, says John Ulzheimer, the site's president of consumer education. The Federal Trade Commission, which has also seen an increase in consumer complaints, was concerned enough about the issue that it held a workshop late last month to examine debt-settlement business practices.


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Debt-settlement companies generally advise clients to make monthly payments into a special account instead of paying creditors. The firm promises to use the accumulated cash to settle debts for pennies on the dollar. They often charge hefty up-front fees, and their tactics can trash customers' credit scores, boost their tax bills and leave them in greater debt than when they started. Rules governing these firms vary by state, but a number of states have recently passed laws allowing for-profit credit-counseling and debt-settlement firms to do business within their borders. Membership in the Association of Settlement Companies, a debt-settlement industry trade group, has roughly doubled in the past year, to more than 150.

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Regulators are concerned about misleading debt-settlement sales practices. In a string of recent cases against such companies, the FTC alleged that firms misled consumers about what services they could deliver, how long it would take and how much it would cost, says Alice Hrdy, an assistant director of the FTC's division of financial practices. And though many debt-settlement companies are set up to look like legal services, "usually it's a sham," says Norman Googel, an assistant attorney general in West Virginia. Consumers often don't receive any legitimate legal services, "and the lawyer is like the Wizard of Oz back there behind the curtain," Mr. Googel says. The high fees charged by debt-settlement firms can prolong the process of paying off debts. The companies often charge an up-front fee of 10% or 15% of the total amount owed. They may also charge monthly fees of about $50, and a back-end fee of about 20% or 30% of the amount "saved" for clients in a settlement.. Consumers in debt-settlement plans often see their credit scores tank. While they're not making payments, of course, their scores will drop. But settling a debt for less than the amount owed is also "a serious negative on your credit score" and stays on your credit report for seven years, says Barry Paperno, consumer operations manager at Fair Isaac Corp., which developed the widely used FICO credit score. Debt settlement can also boost consumers' tax bills, since they generally must pay income tax on the amount of debt forgiven in a settlement.

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Consumers who can't work out debt problems on their own do have alternatives. Many nonprofit credit-counseling organizations offer "debt-management plans," in which consumers steadily pay the full balance owed but often get concessions from creditors such as lower interest charges and waived fees. Such nonprofit programs come with some consumer protections. For example, they must provide services tailored to the needs of individual clients and charge reasonable fees. But even here, consumers must tread carefully. The IRS began examining nonprofit credit-counseling organizations several years ago and found that many were funneling fees to for-profit companies, or doing little or nothing to educate consumers. In its initial examination, the IRS looked at 63 organizations, and in 49 of those cases either the IRS issued proposed or final revocations of nonprofit status, or the organization went out of business or became a for-profit firm on its own.

http://online.wsj.com/article/SB122394458494631223.html (subscription)

[qb]

1. I've heard even the programs that work are no better for your credit rating than bankruptcy.

Does anyone else know about this?

[NYCGirl]

2. I'm working with a debt settlement company, paying off $50,000 of business

debt spread across 4 credit cards. The entire amount has been reduced to about $22,000 and three are done — I'm now paying off the last one. It's taken over 3 years, but I'm very pleased with the result.