Debt settlement companies have thrived on rising defaults on all sorts of consumer debt, especially credit cards and unsecured personal loans. Their profits have been through the roof even though the vast majority of their clients never successfully settle their debts. Newly proposed legislative limits still allow sky-high fees and almost no accountability.
Many debt settlement companies have success rates well below 10%, meaning that only a fraction of debtors that start such programs ever are able to complete them. Some debt settlement companies were found to have success rates of only 2% while their owners pocketed millions of dollars each year in fees and interest.
Uniform Debt Management Services Act
This “common ground” source of legislation has been proposed by the National Conference of Commissioners on Uniform State Laws. The purpose is to provide states with a shared set of principles and best practices that should be fulfilled by lawmakers as they update or enact state laws.
When multiple states agree on common laws, it enables service providers to more easily comply with such laws. Otherwise, a national firm must comply with 51 different sets of laws in order to operate in all states and the District of Columbia. This can create substantial legal bills for any organization.
Problems with Debt Settlement Companies
Debt settlement companies charge exorbitant fees, fail to protect consumers from legal action and consistently misinform consumers about the process. Most debt settlement customers actually end up in worse debt than when they started with the company.
Other problems have surfaced, such as the failure to preserve client trust accounts. Several debt settlement providers have been seized by regulators for transferring client funds into personal accounts or into related businesses for the purpose of enrichment of the owners.
Proposed Regulatory Limits
The proposed limits to be placed on debt settlement companies include:
- State registration requirement–The firm should be registered in any state that the firm accepts clients from.
- Consumer list of services and fees–Prospective clients should be provided with a list of fees for each service offered by the firm prior to enrolling in a plan.
- Credit impact disclosure–Prospective clients should be warned against the negative impact that credit account defaults will have on their credit scores.
- $400 setup fee cap–Debt settlement companies would be limited to charging a setup fee of the lesser of $400 or 4%. Since most debt settlement companies refuse clients with less than $10,000 in debt, the 4% limit rarely would apply. While this is less than what these companies typically charge, it is still entirely too much money for a debtor to owe before the company would even begin applying deposits toward their trust account.
- $50 monthly service fee cap–This cap could be lower, but it does reign in some of the debt settlement companies that charge even higher monthly fees.
Currently, this is a proposed bill that has been sponsored by Texas state Senator Kevin Eltife. It would have far reaching effects, since most debt settlement companies are concentrated in either Texas, Florida or California.
One key area that does not appear to be addressed is the additional fee that is charged as a percentage of the “savings” from a settled debt. Many debt settlement companies charge up to 25% of whatever the reduction is in the final settlement. For a $5,000 debt that is settled for $3,500, this could amount to an additional fee of $375.
Another shortcoming is that the bill does not require debt settlement companies to inform clients of a potential tax liability that could result from settled debt. Since forgiven debt is normally taxable, some clients could face a substantial income tax liability as a result of settlements.
Debt settlement companies have defended this omission since most are not licensed to provide tax advice. However, a simple disclosure should be provided to prospective clients that at least informs them of the issuance of Form 1099-C for forgiven debt of $600 or more, which in many situations can cause an increase in personal income tax liability.
Any restriction on debt settlement firms is welcome. However, this act fails to provide enough protection for future debt settlement clients and victims.
Tags: debt settlement company legislation, debt settlement company regulation, Uniform Debt Management Services Act
Nice article; however, you are missing the key points. I am in the settlement industry and most people who complain about it simply do not have the ability to set a goal and see it through until the end. Or, in many more cases, these people who have the “me, me, me” or “I want it now” mentality will never take the time to understand what they are getting into nor have the patience to see it through til the end. When we set up a program, a client fully understands the parameters of the program, the fees being charged, the potential for lawsuits, etc. When one account gets turned over to collections through an attorneys’ office, these clients prematurely panic thinking that will get sued and they drop out of the program without even discussing the collection activity. This is the clients’ fault, not the settlement companies fault. When they drop out, we give them a partial refund, but not the whole amount. We charge them only for the work performed. I find it fascinating that the lower the debts that a person has, the more likely it is that they will never finish a settlement program . On the reverse end, people with $100k or more in debt not only complete the program, they will actually do whatever is necessary to finish the program early by doubling up on payments and, these larger accounts never complain. If you have a debt of $50k and you know a program will cost you around $27k including fees, how is this a bad thing?
Dear Parvenu:
Thank you for your comment. While it is true that many debtors may procrastinate or fail to stick to a repayment plan, it is also true that the debt settlement industry has fundamental flaws that have caused substantial economic hardship for most clients. New York Attorney General Andrew Cuomo has labeled the debt settlement industry as a “rogue industry.” When signing up with a debt settlement company, a consumer creates an additional creditor that they will owe thousands of dollars to.
Clients are routinely mislead by debt settlement companies about the “savings” they will benefit from. Creditors are not granting the “pennies on the dollar” settlements that many are claiming. In addition, no debt settlement company to my knowledge informs clients that they will also receive Form 1099-C for a settled account. This serves as notice to the IRS that a portion of their debt has been forgiven. This forgiven debt is taxable as income, which can reduce the “savings” by up to 40%.
These companies sell a single service to any client with debt, even though a huge percentage of those potential customers would be better served going through credit counseling or even bankruptcy.
I appreciate your perspective and want to remind our readers that debt settlement companies cannot do anything that you cannot do on your own. They are for-profit companies that use high pressure sales representatives rather than counselors for enrollment.
Student loan problem and rip-off by a collection agency. I complied with a request by a student loan lender by requesting a payment plan – monthly deductions from my bank. I sent a form with my bank account, but did not realize that my routing number was not the number listed on my deposit slip. The lender supposedly tried to reach me by phone — but did not send notice to my email which I provided — that the bank routing number was incorrect. They did not try to contact the bank to request my response as well. They simply turned my account over to a collection agency. The collection agency demanded a $500 set up fee to collect my payments and then stated that they will charge $2500 as a collection fee in addition to the $500 set up fee, and a monthly payment…with interest and collection fees that “may change” over the period of the loan. I tried to resolve the collection problem with the lender — that I didn’t realize the difference between the router number on my check was different from what was on my preprinted deposit slips….but they were very “nasty” and refused to discuss the issue with me. The collection agency they turned me over to is asking too much money for a “set-up” fee — when I made the call to them, and stated that fees in addition to the $2500 collection fee stated in their correspondence may escalate even if my payments are made on a timely basis.
Is this extortion, fraudulent, or what? I am already in debt, tried to resolve it with the lender, but now will have to pay $6000 plus over what the original debt is. This is a student loan — that the lender started to collect while I was in my 2 year of college and which forced me out of school to pay. I haven’t been able to complete my education to find a job that would pay me enough to afford the repayment since I don’t have a college degree — the very purpose of my parents indebting me to seek an education of “higher learning.” I think the “business” of education and the collection agencies are creating a serious debt burden upon the young people of this country so that your credit is over run long before you even can get a degree or a job that will afford the repayment of this debt.
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The FTC has finally acted to prevent advance fees charged by debt settlement companies who sell services by phone:
FTC Rules Against Debt Settlement Companies