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Debt Settlement Companies in for a World of Hurt in the U.S.

Debt settlement companies in the United States had better brace for some interesting times, and not good times for them.

The Attorney General of New York recently issued subpoenas to fourteen debt settlement companies, not in an interest to learn more about them, but to give him the evidence he need to close down the industry.

Seriously, New York has already made up their mind about the industry when they say things like, “Today, millions of hardworking Americans are finding themselves imprisoned by debt. In response, a rogue industry has stepped in, offering consumers false hope, charging tremendous fees, and leaving them in a worse financial situation,” said Attorney General Cuomo. “Our mission is clear: to hold unscrupulous businesses accountable; to rein in a renegade industry; and to ensure that people are not victimized when faced with financial hardship.”

Cuomo has already identified the debt settlement industry as a rouge industry in his mind. What do you think is going to happen? The internal conversation was not about inquiry, it was about inquisition.

While I have seen some good debt settlements for people that have the money on hand to settle right now, I’ve seen much more pain and destruction with people that are making monthly payments into a settlement company hopping to save up enough money to settle.

Where the debt settlement industry runs into trouble is allowing these companies to first deduct their fees for service from first deposited funds. And in order to deposit the funds with the debt settlement company the consumer can’t pay their credit card company. They don’t have enough money to go around.

So in these early days when the creditor is not getting paid, the money is going to the debt settlement company, the collection activity is increasing, they might be sued by the creditor, their credit report is going down the toilet, and the consumer is nervous and stressed, what does the settlement company do; they keep the deposited funds towards their fees not earned yet.

And I’ve seen some debt settlement companies that make the client pay them monthly but instruct the client to save the money for the settlement on the side. So in this case all the money paid to the debt settlement company is only paid for fees not earned yet.

The fourteen companies named by the New York Attorney General have already been branded, right or wrong, good or bad, the moment they appeared on that list of companies they immediately became targets for other states.

Right now the debt settlement industry is saying that this is a hurdle they can overcome but I don’t think so. My bet is that this is the beginning of the end for most debt settlement companies and that this is not a one-off winnable battle with New York, this is the first skirmish in a war that will result in companies going out of business, some people going to jail, fines and penalties.

This is not going to end well for debt settlement companies and if I was a consumer thinking of using a debt settlement company right now, I’d wait until this mess is over before starting with a debt settlement company and hoping that it will result in a good outcome.

Best case scenario here is that federal legislation will be passed to regulate the debt settlement industry so they have one set of regulations to follow.

Debt Settlement Companies in for a World of Hurt in the U.S.
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • http://www.howtogetoutofdebtblog.com Kate

    Years ago the weight loss industry went through a similar “inquisition”. The big names like Jenny Craig and Nutri-System were named even though they were already setting the standard. It was all politics.

    What is going in with Debt Settlement is the same thing, the solid companies are being targeted to make Cuomo feel legitimate. This is nothing more than the banking lobby working behind the scenes to stave off an industry that helps consumers and hurts the banking industries bottom line.

    I think that your advise is bad for consumers. Reputable Debt Settlement shorten the time frame to get out of debt and they work on behalf of consumers, not the banks.

    The message that should be given to consumers is to fight back. Go to the TASK website and find a member company that they are comfortable with.

    Kates last blog post..The Ugly Truth about Consumer Credit Counseling – aka CCCS

    • Dan

      Very Well put Kate…I am completely shocked by what went on at the senate hearing. I think that Mr. Ansbach needed to realize that he had the entire debt settlement industries future in his hands and with that responded to that bull that was being slung in a much more matter of fact, what’s really going on here, to be honest he should have simply asked to give up his seat to one of the consumers he mentioned had a good experience with debt settlment and allowed them to respond. The debt settlement industry would have been much better off. I would have also like to have seen the response to that question from the Chairman had he asked “can I give up my seat to one of the consumers that flew in from Illinois today” I will keep a very close eye and ear on this issue. I am not familiar with how quickly requlations and bills are passed and would like to know if this ban on upfront fee’s is passed, when would the industry be likely to see this happen..in the next year?..by the end of the year?, a couple years from now?
      Thanks

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