An excellent article by Chris Rickert out of Wisconsin exposed a very interesting bit of news from The Association of Settlement Companies (TASC) reveling how ineffective debt settlement is for most people.
When I first wrote my article “The Truth About The Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, and Bankruptcy“, TASC was officially saying that 45-50% of consumers in debt settlement programs settled some of their debt. In this recent article David Leuthold the executive director of TASC is sourced as saying that now only 34% of people are settling any debts. – Source
Here are some interesting parts of the longer article you can read here.
Faced with $20,000 in credit card debt, rising credit card interest rates and an uncertain employment future, Ruth Cole of Middleton succumbed to the “very persuasive” pitch the caller from PDM International made in the fall.
The Texas-based financial services company with an F rating from the Better Business Bureau told Cole that for an up-front payment of $1,490, it could lower the interest rates on her cards, ultimately saving her thousands of dollars and more than making up for the initial fee.
Caught at a vulnerable moment, Cole handed over the $1,490.
She said she was told if she wanted to back out of the agreement, she could do so for a $199 cancellation fee. But two and a half weeks later, when she tried to do just that, the company changed its story and refused to refund her any of her money.
“In some sense, what they’re saying is logical,” Cole, 66, remembers thinking at the time. “I feel like I was gullible.”
Plale said her agency assigns complaints about adjustment service companies to one of four examiners, who try to contact the company and, if it’s not licensed, issue a stop-work order.
DFI has the power to take the firms to court and get refunds for their customers if the firms acted unethically, Plale said.
“In some cases we’re successful in getting money refunded to the customer,” she said. “I don’t know if it’s even half the time.”
Part of the problem is finding the firms, she said. Some close up shop before DFI becomes aware of them.
Janet Jenkins, administrator of the division of trade and consumer protection with the state Department of Agriculture, Trade and Consumer Protection, said that beginning in fall 2008, her department “began to see a lot more” complaints about foreclosure consultants, which promise to work with customers’ lenders to save their homes from foreclosure.
The increase played a part in legislators’ decision in March to pass a law that allowed DATCP to regulate the firms, although DFI still has jurisdiction over their practices.
In October, the state attorney general filed suit against California loan modification company 21st Century Legal Services, accusing it of misrepresenting itself to consumers and failing to provide them with signed copies of sales agreements, among other allegations. Jenkins said there were about 20 consumer complaints against 21st Century.
‘These are scams’
While firms out to scam indebted consumers typically operate under a pretty simple scheme – take their money but don’t provide any service in return – debt settlement firms have a multistep modus operandi that is described similarly by detractors and advocates.
The firms offer to cut your debt – almost always on credit cards – by negotiating with a creditor for a lower lump sum payment to wipe out your bill.
The downsides are that while the debtor is paying into an account to build up that lump sum, his credit rating can falter and the total debt he owes continues to rise. The upside, according to the industry, is that you can cut your total debt by far more than if you negotiate yourself.
“For the most part, these are scams,” according to Paul Egide, director of consumer affairs for DFI. “The customer doesn’t really understand what they’re getting themselves into.”
But David Leuthold, executive director of The Association of Settlement Companies, said debt settlement is an important option for consumers who have few others for getting out of debt.
“What you have to do is look at the alternatives for the consumer,” he said.
They could try to negotiate directly with their creditors, he said, but will likely end up owing more in a shorter period of time than they would had they worked with a debt settlement firm. On average, TASC members have been able to negotiate settlement payments to clients’ creditors of about 42 cents on the dollar, he said.
He acknowledged that only about 34 percent of clients stick with the program long enough to achieve such results but contended that’s more than other debt-help programs.