The Federal Trade Commission Puts New Restrictions Debt Settlement Companies to Curb Abuses the FTC Had Ignored Despite Repeated Calls by Consumer Advocates and Enforcement Actions Brought By 20 States.
On July 29, 2010, the New York Times reported that “The Federal Trade Commission on Thursday announced restrictions on companies that purport to help borrowers get rid of crippling amounts of debt. The effort aims to address complaints about lenders that charge huge fees but fail to reduce the obligations of customers in debt. Jon Leibowitz, the F.T.C. chairman, with Vice President Joe Biden, announced the new consumer protections Thursday. The rules, which will take effect in the fall, prohibit companies from charging a fee before they settle or reduce a customer’s credit card or unsecured debt. The rules also require that the companies set up dedicated accounts for debt relief payments by consumers and disclose how long the debt-reduction efforts will take, what they will cost and the potentially negative consequences that could occur.
“Too many of these companies pick the last dollar out of consumers’ pocket and, far from leaving them better off, push them deeper into debt, even bankruptcy,” Jon Leibowitz, chairman of the F.T.C., said in a statement announcing the regulations.”
The changes made to the United States Bankruptcy Code by the 2005 Amendments to the Code very substantially increased the cost of consumer bankruptcy and were intended to channel consumer debtors away from bankruptcy and into so-called debt management or debt settlement agencies.
The changes became effective for cases filed on or after October 17, 2005, and the Code now requires means testing, substantial documentation of income and obtaining a certificate of credit counseling to establish eligibility for a Chapter 7 ‘fresh start’ – clean slate consumer bankruptcy or a Chapter 13 Bankruptcy.
Whatever the motives of those who advocated and enacted the changes, one of the effects has been to foster the explosive growth of the so-called debt settlement/debt management industry which has operated for the most part without any systematic regulation. “Debt Adjusters” are regulated by the State of New Jersey by N.J.S.A C.17:16G-1 et. seq. but the effectiveness, if any, of the regulation is unclear. Federal Regulation to curb debt settlement abuses has been proposed. http://www.consumerfed.org/elements/www.consumerfed.org/file/debt_settlement_pr061610.pdf
These so-called debt management/debt settlement companies have been allowed to operate without strict and systematic supervision of their advertising and business practices and the result has been both predictable and unfortunate. With increasing frequency, we have been retained by clients who previously enrolled in so-called “debt management plans” because so-called “debt counselors” promised to negotiate with credit card lenders and produce an agreement providing for a reduction of 50% or less of their debts to be repaid over a period of time.
The experiences of our clients who have been victimized are not unusual. The New York Times of June 19, 2010, reports that many of these so-called debt relief or debt management companies have taken thousands of dollars from debtors and produced nothing but grief for those who are already suffering from the impact of the financial folly of the past decade. *
“The long recession has delivered an abundance of customers — debt-saturated Americans, suffering lost jobs and income, sliding toward bankruptcy. The settlement companies typically harvest fees reaching 15 to 20 percent of the credit card balances carried by their customers, and they tend to collect upfront, regardless of whether a customer’s debt is actually reduced. In April, the United States Government Accountability Office released a report drawing on undercover agents who posed as prospective customers at 20 debt settlement companies. According to the Report, 17 of the 20 firms advised clients to stop paying their credit card bills. Some companies marketed their programs as if they had the imprimatur of the federal government, with one advertising itself as a “national debt relief stimulus plan.” Several claimed that 85 to 100 percent of their customers completed their programs.
“The vast majority of companies provided fraudulent and deceptive information,” said Gregory D. Kutz, managing director of forensic audits and special investigations at the G.A.O. in testimony before the Senate Commerce Committee during an April hearing. State attorneys general from New York to California and consumer watchdogs like the Better Business Bureau say the industry’s proceeds come at the direct expense of financially troubled Americans who are being fleeced of their last dollars with dubious promises. Consumers rarely emerge from debt settlement programs with their credit card balances eliminated, these critics say, and many wind up worse off, with severely damaged credit, ceaseless threats from collection agents and lawsuits from creditors.” New York Times http://www.nytimes.com/2010/06/19/business/economy/19debt.html?_r=1
Debtors who are considering enrolling in a debt settlement or debt management program should very carefully research whether or not enrolling in the program would be beneficial to them. Here are some basic do’s and don’ts:
Don’t enroll in a debt management program because you have heard some enticing radio or television commercial which promises to fix your problems without explaining in detail exactly how that fix is going to work.
Don’t t be misled by the deceptive names used by these debt management/debt settlement scam artists which suggest they are in some manner a part of a federal debt relief program. Clients have reported that prior to consulting our firm they were fleeced when they responded to a radio or television commercials which suggest that they are somehow part of a government program designed to assist debtors.
Don’t enroll in a debt management plan because they claim to have a religious affiliation or have a charitable purpose. One of our clients lost thousands of dollars she paid to a so-called debt management program called Christian Crossroads. Christian Crossroads is now under investigation by the Attorney General of Florida and appears to have disappeared.
Don’t take the advice of friends and relatives about whether or not to enroll in a debt management or debt settlement program as an alternative to filing a bankruptcy. They are no doubt well meaning, but so were the parents who once hung a garlic clove around the necks of their children because they believed it would ward off disease.
Do read the New York Times article of June 19, 2010, very carefully and seek additional information from the sources mentioned in the article.
Do consult an experienced consumer bankruptcy lawyer if you are suffering from serious debt problems. Our firm and other highly experienced bankruptcy attorneys offer a free initial consultation at which time a full review of the alternatives available to you can be discussed.
Do, at all times, keep in mind that if you are offered a ‘great deal’ which appears to be too good to be true, it almost certainly is not true.
*It should be emphasized that there are legitimate and effective debt management agencies who do attempt to work out debt settlement plans for those who enroll in their programs. In fact, we have been retained by clients who were advised by these legitimate debt settlement/debt management agencies that they should consult an attorney about filing a bankruptcy because no feasible debt management plan could be created for them.