Credit and Debt Blog

Minnesota residents can count themselves among the first in the nation to have new protections against the rogue debt settlement industry. A new law that went into effect August 1, 2009 has blocked the upfront fee model favored by debt settlement companies.

Debt settlement companies overwhelmingly prefer to charge upfront fees to their clients. After all, with reported success rates of debt settlement companies at 7-11%, this is the only way they can continue to produce massive profits.

The Minnesota law changes things substantially. Sure it is true that debt settlement companies can now charge a higher percentage of the “savings” once a debt has been settled. However, they can no longer gouge unsuspecting clients with upfront fees of 15% or more of the total debt.

This marks a real turning point in the battle against a renegade industry. Debt settlement companies rely on heavy advertising on television, radio and the internet in order to drive debtors into their programs. They rely on massive upfront fees in order to cover these upfront costs and to drive profits.

The shift that comes with this law requires that debt settlement companies actually provide a service if they want to get paid. This could increase their focus on actually helping their customers settle debt rather than simply on enrolling new clients and keeping them on board long enough to collect the entire 15% upfront fees.

What is likely is that many debt settlement companies will simply choose not to offer plans to Minnesota residents. Of those that do, any local advertising will certainly dry up.

Minnesota Attorney General Lori Swanson had this to say:

Debt-settlement companies really put people into a financial death spiral. They get further and further behind and it’s hard to get out.

Those who are facing mounting pressure from creditors are encouraged to first seek credit counseling. Reputable agencies can often help clients obtain lower interest rates and lower payments while at the same time relieving them of late fees. With credit counseling, you can get debt relief and improve your credit. Debt settlement on the other hand frequently results in judgments, garnishments and increased collection efforts.