Consumer Page: Debt settlement plans can backfire
BY PHIL MULKINS World Action Line Editor
Wednesday, October 24, 2012
10/24/12 at 2:48 AM
Only one in 10 consumers lured into "debt settlement" plans actually become "debt free" in the amount of time promised in advertising. This makes the risky scheme the No. 1 threat facing the most deeply indebted Americans, says a consumer alert issued Oct. 17 by the nonprofit National Association of Consumer Bankruptcy Attorneys.
Available online at tulsaworld.com/NACBAdebtsettle , the NACBA consumer alert notes, "Already struggling with home foreclosures, harsh bank and credit card fees, and other major financial challenges, America's most deeply indebted consumers are now falling victim to a major new threat: 'debt settlement' schemes promising to make clients 'debt free' in a short period of time. Most consumers pursuing debt settlement services find themselves facing not relief but steeper financial losses."
The online article "Debt Settlement Companies" by Tulsa bankruptcy attorney and NACBA member Dan Nunley, tulsaworld.com/NunleyDebtSettlers reveals "the truth about debt settlement companies in Oklahoma" and blogs on debt settlement horror stories.
Margo Mitchell, CEO of Consumer Credit Counseling Centers of Oklahoma, said, "Debt settlement companies too often make unrealistic promises and the consumer ends up further in debt. Debt settlement is an expanding bubble that could burst, dealing the economy yet another blow if enough consumers are hurt by the fallout. Dozens of companies offering debt settlement advertise on TV day and night, making families not yet past due think they can easily escape legal debts, just because it says so on TV."
NACBA continues, "Even the industry acknowledges, though not in its radio and online advertising, that debt settlement schemes fail to work for about two-thirds of clients. Federal and state officials put the debt-settlement success rate even lower, at about one in 10 cases, meaning the vast majority of unwary, uninformed consumers end up with more red ink, not the promised debt-free outcome."
The private debt-settlement industry remains robust. More than 500,000 Americans with $15 billion of debt are currently enrolled in debt settlement programs, according to industry estimates and one in eight U.S. households has $10,000 in credit card debt. As only a tiny proportion of debts are actually settled by these companies, clients are typically left worse off than they were when they started.
There is now across-the-board agreement on the danger debt settlement schemes pose. The Better Business Bureau designates "debt settlement" an "inherently problematic business." The New York City Department of Consumer Affairs calls it "the single greatest consumer fraud of the year." The U.S. Government Accountability Office, the Federal Trade Commission, 41 state attorneys general, consumer and legal services entities and consumer bankruptcy attorneys all have substantial evidence of its abuses.
Debt settlement schemes encourage consumers to default on their debts as creditors will not negotiate reduced balances with consumers who are still current on their bills. Debt settlement companies instruct their clients to stop making monthly payments, explaining that they will negotiate settlements with funds the clients have paid in lieu of their monthly debt repayments. Once clients default, they face fines, penalties, higher interest rates and are subjected to increasingly aggressive debt-collection efforts including litigation and wage garnishment. Consumers often find themselves worse off than when the debt settlement process began: deeper in debt with low credit scores.
FTC agreement bans deceptive ads
The Federal Trade Commission charged Ohio-based United Debt Associates and its owner Ryan Golembiewski with fraudulently claiming on 17 websites that consumers can quickly get out of debt using its debt settlement companies. He agreed to a settlement barring deceptive claims and to a $390,000 judgment. It was entered Oct. 4 by the U.S. District Court for the Southern District of Ohio, Eastern Division.
FTC's complaint said website claims and testimonials were "lead generators" paid by debt settlement companies to refer consumers who responded to the deceptive ads. Websites included LegitimateDebtSettlement.com, DebtReliefEmergency.com, DebtDecreaser.com, FreeDebtReductionhelp.com, and DisputeDebts.com. They earned $24.60 per lead generated by directing consumers to either provide their contact information online or call a toll-free number for help with credit card debt.
Consumers who called were either routed directly to the debt settlement companies or asked to provide preliminary information to the defendants, states the FTC's complaint. Deceptive claims they used to entice consumer contact include, "Once creditors agree to make a deal, you can get out of debt in 12 to 36 months," and "The U.S. government decided to introduce a stimulus package to boost the financial institutions and prevent them from breaking down. Part of this stimulus money is being utilized by the credit card companies to offer debt settlements to the users."
Purported consumer testimonials on the websites conveyed the impression consumers could successfully and quickly reduce or eliminate debts by using debt settlement services the defendants advertised, alleged the FTC. They did not have support for the claims made but instead merely posted claims provided by debt settlement companies or copied information from other debt relief websites.
The settlement bans defendants from engaging in or assisting others to engage in debt relief services and bars them from making misrepresentations when marketing financial products or goods or services. It requires substantiation for benefits, performances or efficacy claims for financial products. It prohibits disclosure of customer information and requires defendants to destroy such information within 30 days of court approval.
Original Print Headline: Debt settlement plans can backfire
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