Bankruptcy

Debt Settlement Companies Come Under Increasing Scrutiny from Regulators

By Jonathan Ginsberg, Atlanta Bankruptcy Attorney

The lead article in the Economy section of the June 18, 2010 New York Times offers revealing insight into the practices of “debt settlement” companies.   Debt settlement companies position themselves as alternatives to bankruptcy, suggesting that they have insight into “secrets that the credit card companies don’t want you to know.”   In fact, the business models used by debt settlement vendors is fairly simple.   As the Times article explains:

In the typical arrangement, the companies direct consumers to set up special accounts and stock them with monthly deposits while skipping their credit card payments. Once balances reach sufficient size, negotiators strike lump-sum settlements with credit card companies that can cut debts in half. The programs generally last two to three years.

The problem, however is this:

What they don?t tell their customers is when you stop sending the money, creditors get angry,? said Andrew G. Pizor, a staff lawyer at the National Consumer Law Center. ?Collection agents call. Sometimes they sue. People think they?re settling their problems and getting some relief, and lo and behold they get slammed with a lawsuit.

Further, “the industry?s own figures show that clients typically fail to secure relief. In a survey of its members, the Association of Settlement Companies found that three years after enrolling, only 34 percent of customers had either completed programs or were still saving for settlements.  According to one debt settlement executive quoted by the Times, the entire industry is like a “Ponzi scheme.”

Congress and federal regulators are apparently getting the message from angry and disappointed consumers.   Currently, several  proposals are on the table that would ban upfront fees, cap total fees charged and require extensive disclosure about services to be performed.

My BLN colleagues have expressed their views about debt settlement vendors here and here.

So what should a consumer do about unmanageable debt?  In my opinion, the starting point should be a consultation with a bankruptcy lawyer.  This does not mean that you should file bankruptcy – it means that you should spend an hour with an attorney to educate yourself about what to expect over the next few months, about mistakes to avoid if bankruptcy is an option and to gain perspective about the depth of your problem.

In my Atlanta area bankruptcy practice, I regularly meet with men and women for a small fee to discuss debt issues, with bankruptcy comprising only a small part of the conversation.   It is not uncommon for me to meet with a prospective client three our four times over the course of a year or longer.

In my opinion debt settlement companies are filling a market niche of consumers who want a quick and simple solution to a complicated problem.   There is no “one size fits all” solution, for example, to $85,000 of credit card debt if your household income is $50,000 annually, and all of your options are likely to involve pain and sacrifice.   You have to be an active and educated participant in identifying and evaluating all of your options.

Full post as published by Bankruptcy Law Network on June 19, 2010 (boomark / email).