Beware of Debt Settlement Trap Consumer Groups Offer Debt-Strapped Consumers Advice on Getting Real Relief

For Immediate Release

Consumers Union
Contact: 

Susan Grant, CFA, 202-387-6121
Linda Sherry, Consumer Action, 202-544-3088
Gail Hillebrand, Consumers Union, 415-431-6747

Beware of Debt Settlement Trap Consumer Groups Offer Debt-Strapped Consumers Advice on Getting Real Relief

WASHINGTON - As the holiday bills come due and jobs remain scarce, many families
are struggling with their finances and looking for help, sometimes in
the wrong places. New tips from Consumer Federation of America,
Consumers Union, Consumer Action, and the National Consumer Law Center
warn that using a debt settlement company could be a trap that will
leave consumers deeper in debt instead of eliminating the debt.

In debt settlement, consumers are instructed to make monthly savings
payments, usually to a special bank account, until there is enough to
make a lump-sum settlement offer to their creditors. But while
consumers are putting money into their accounts, the debt settlement
companies are taking their fees out of them. Saving to try to settle
one debt can take a year or more, and since consumers typically have
multiple debts, the process can take three or four years. However, debt
settlement companies usually take out all of their fees, ranging from
14 to 20 percent of the total debt, within the first half of the
contract. For debts totaling $20,000, a consumer could pay fees of
$2,800 to $4,000.

“Debt settlement companies usually collect most or all of their fees
from consumers long before they have eliminated any of their debts, and
consumers pay these high fees regardless of whether their debts are
settled or not,” said Susan Grant, Consumer Federation of America’s
Director of Consumer Protection.

“There is no guarantee that your debts will be settled,” said Gail
Hillebrand, Financial Services Campaign Manager at Consumers Union.
“The industry’s own statistics show that debt settlement doesn’t
eliminate all of the debt for most consumers. The full fee can be
deducted from your savings even if you are still stuck with your debts.”

The drop-out rate for debt settlement services is very high; a study
of one company’s customers revealed that 60 percent had cancelled
within 5 to 6 months after starting debt settlement. Claims for success
rates can be very misleading because they often don’t take into
consideration the cost of the fees consumer pay or the size of those
debts that are never settled.

Using a debt settlement program doesn’t stop debt collection and
could make a debt situation worse. “Debt settlement companies may not
contact the creditors for months and some even tell consumers not to
have any contact with their creditors,” said Linda Sherry, Consumer
Action’s Director of National Priorities. “Consumers’ debts increase
because of interest and penalties, and they may end up being hounded by
debt collectors, sued by their creditors, having their wages garnished,
and left with ruined credit ratings.”

The Federal Trade Commission has proposed rules that would stop
companies that use telemarketing to sell debt settlement and other
types of debt relief services from charging fees before they settle the
debts. The FTC proposed rule would also require that debt relief
services clearly disclose how long it will take to settle debts and
reveal any negative impacts including the fact that not all creditors
will make agreements.

Nineteen consumer and community organizations asked the FTC to go
even farther and stop debt relief services from making claims about
results, telling consumers not to pay their creditors, and interfering
with communications between creditors and consumers. They also called
for a 90-day “money back” cancellation period.

Tips for Consumers on How to Get Real Debt Relief

· Try to resolve your debt problems with your creditors directly.
You may be able to get your interest rate lowered, late charges
forgiven, and your monthly payments reduced.

· Contact a nonprofit credit counseling service for advice. It may
be possible to work out a plan through the credit counseling service to
pay off the debts over time. To find the nearest nonprofit credit
counseling services, consumers can contact the National Foundation for
Credit Counseling, www.nfcc.org, 1-800-388-2227 or the Association of Independent Consumer Credit Counseling Agencies, www.aiccca.org, 1-866-703-8787.

· Know your rights. Ask your Attorney General’s Office if state law
limits the amount or timing of debt settlement fees in your state. Find
your state AG at www.naag.org.

· Read the fine print. Walk away if the contract doesn’t contain the
promises that were made to you, or if the contract contradicts what you
were told.

· Look for services that charge a fee only after the service actually settles your debts.

· Take immediate action if you can’t make your mortgage or car
payments. (Debt settlement services don’t usually address mortgage or
car debt.) Contact your lender or mortgage servicer immediately to try
to work out new payment arrangements. For help regarding your mortgage,
call 1-800-569-4287 or go to http://nhl.gov/offices/hsg/sfh/hcc/hcs.cfm to find a local housing counselor certified by the federal Department of Housing and Urban Development.

· Consider bankruptcy. Some people who have too much debt need the
fresh start that bankruptcy provides. Get legal advice to see if that
is the right choice for you.

The complete tips on debt settlement in English and Spanish are available at:

http://www.consumerfed.org/finance/credit_counseling.asp

http://www.defendyourdollars.org/2010/01/what_you_need_to_know_about_de.html

http://www.consumer-action.org/alerts/articles/debt_settlement/

 

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The Consumer Federation of America is a non-profit association of more than 280 groups that, since 1968, has sought to advance the consumer interest through advocacy and education.

Consumers Union of United States, Inc., publisher of Consumer Reports, is a nonprofit membership organization chartered in 1936 to provide consumers with information, education, and counsel about goods, services, health and personal finance. CU's publications and services carry no outside advertising and receive no commercial support.

Consumer Action is a national non-profit education and advocacy organization that has served consumers since 1971. CA serves consumers nationwide by advancing consumer rights in the fields of credit, banking, housing, privacy, insurance and utilities.

The National Consumer Law Center is a nonprofit organization specializing in consumer issues on behalf of low-income people. NCLC works with thousands of legal services, government and private attorneys, as well as community groups and organizations, from all states that represent low-income and elderly individuals on consumer issues.

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