After Darren Robinson lost his job at a factory, he and his girlfriend Julie Fitzpatrick accrued almost $10,000 in credit card debt paying for living expenses and medical bills. Fitzpatrick found a company online that promised to make them debt free. The couple told the Chicago Tribune that they paid almost $1,500 in fees to the debt settlement company. After a few months, only $2,000 of the debt was settled, and their debts ballooned to $12,000 as collection calls and fees increased.
Their story is not uncommon. In fact, the Illinois Attorney General’s office has seen a sharp rise in complaints against debt settlement companies, culminating in a lawsuit filed earlier this month alleging four companies of abusive and deceptive practices. “These companies are unfairly luring financially strapped consumers with misleading claims that they can effectively eliminate consumers’ debt,” Attorney General Lisa Madigan says. “The reality is that, after enrolling in a debt settlement program, consumers too often find themselves in even worse financial straits.”
The Attorney General also introduced legislation that would improve the practices of the debt settlement industry and root out the worst abuses. HB 4781, sponsored by Rep. Marlow Colvin (D-Chicago) in the House and Sen. Jacqueline Collins (D-Chicago) in the Senate, would prevent debt settlement agencies from stating the outcomes of their services or engage in any deceptive advertising; in fact, they would have to explicitly state that not all creditors will accept a settlement and that stopping payments to their creditors could result in debt collection harassment, legal action, and harmed credit scores. The bill would also prohibit any up-front fees, limit settlement fees to 5 percent of the amount saved by using their service, and advising consumers to stop paying their creditors. The House Consumer Protection Committee will hold a hearing tomorrow at 4pm to consider HB 4781.
Debt settlement companies differ from non-profit credit counseling agencies in that they do not send monthly payments to creditors. Instead, they generally charge exorbitant up-front fees and maintain consumers’ monthly payments in a separate account until they believe enough has been saved to settle the debt with the creditor. For the first several months, the monthly payments don’t go towards paying down the debt at all—they simply pay off the fees charged by the debt settlement company. Debt settlement companies often advise their customers to stop paying their creditors as they believe this will improve their negotiating position with the creditor. One company representative told the National Consumer Law Center (NCLC) that “after twelve months of not paying and not talking to creditors, [the creditors] will feel that some money is better than none.” However, despite promises to eliminate their customers’ debt, there is no guarantee that creditors will accept the debt settlement company’s proposal.
There are a number of problems with the debt settlement business model. Once a consumer stops paying their creditors, they are likely to face debt collection harassment or even lawsuits. Creditors add more and more fees and raise interest rates, causing the debt to grow. Given the precarious financial situation of the consumer and the high rates of the debt settlement agencies, it often takes many years for the consumer to save up enough money to settle their debts, if they are able to complete the program at all. Since consumers can negotiate with creditors themselves, it is questionable how much benefit debt settlement agencies provide for their high price tag. According to the Federal Trade Commission and Better Business Bureau (see NCLC), some debt settlement companies do not follow up with creditors at all and simply take in fees while their customers are increasingly harassed by debt collectors.
Woodstock supports the Attorney General’s efforts to stop abusive debt settlement companies from preying upon those in dire financial straits. Consumers struggling with debt can find reputable, low-cost alternatives to debt settlement companies at www.nfcc.org.