Tuesday, August 3, 2010

Debt Settlement Company Scams

Debt settlement scams are one of the fastest growing consumer problems.  It works like this:  you're drowning in debt.  Before you have a chance to consult with someone who knows how to give you good advice, you respond to an email, TV, radio or website advertisement advertising debt relief.  A debt settlement company convinces you that bankruptcy is not a good option for you, and sets you up with a plan to save money to settle your unsecured debts (like credit cards, medical accounts and signature loans).

The company tells you that you pay them a setup fee, stop paying your debts, and eventually they will negotiate with your creditors for lump sum settlements at reduced rates.  They tell you they have a 95% success rate.  It sounds good.  The setup fee is paid in monthly installments for maybe six months or so.

After the setup fee is paid, they start negotiating with your creditors, and maybe they actually get you a deal of 50% off or so on one account.  At this point, you have paid the company $5,000 in fees, but if they cut all your debts by half, it's still a good deal, so you hope....

Then reality sets in:  you get your first collection law suit from a creditor who refuses to deal with the debt settlement company.  The DSC says they don't practice law and therefore cannot defend you against the collection suit (maybe contrary to what they implied when they were convincing you to sign up), but they "help" you write your own response to the law suit.  Your "response" is not sufficient, and the creditor gets a judgment against you and begins to garnish your bank account and wages.  Eventually, you realize that the DSC is not going to solve your financial problems and you end up filing bankruptcy, which costs less than what you've already paid to the DSC.

I have seen this pattern over and over again in my practice.  Yesterday a smart young woman called to get my help on a collection law suit.  At the end of the conversation, she happened to mention something about a debt settlement company.  It turns out she has paid them over $10,000 over several years, and they have not settled a single account of hers.  These predators are so good at scamming people that she still didn't realize how badly she had been taken.

The bad news is that there are a lot of these companies out there, doing a lot of marketing to vulnerable consumers.  The companies tend to hide their identity and create multiple corporations to make it hard to find out who they even are and to discourage law suits against them.  They typically require payment of their fee first, and also take a percentage of money saved in any settlements.  They prey on working people.

The good news is that Ohio law protects consumers, outlawing the kind of payments these companies charge.  But the law does not stop them.  They are willing to break the law because they make so much money in the process.  In some cases, a law suit against the debt settlement company is appropriate, to recover the money lost, including attorney fees and court costs.  I have found that with a proper investigation into who took my client's money, most DSC's will settle the claims against them.

So, what should you do instead of signing up with one of these horrible predatory corporations?  You may want to consult with a bankruptcy attorney.  Many do not charge for the initial consultation, or may charge a small fee.  (I'll make bankruptcy the topic of a future blog.)  Another option is consulting with a legitimate, non-profit, credit counseling service.  How do you tell the difference?  The legitimate credit counseling services charge a very low fee (maybe $25/month), or are free.

I'm amazed at the scope of advertising these companies do on "legitimate" media.  Don't fall for the scams.

Greg Reichenbach
Bluffton, Ohio

Further reading:

West Virginia attorney general
Texas attorney general
New York attorney general
Vermont attorney general
Illinois attorney general

Ohio attorney general asks the FTC for stronger regulation of DSC's

FTC to issue new rules for debt settlement companies

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