Burdened with debt, millions of consumers contact debt settlement agencies in search of help – only to find out that what looked like the light at the end of the tunnel turned into a nightmare because of huge fees and deceptive business practices. As bills keep piling on the kitchen tables of a growing number of Americans, lack of regulation over the debt settlement industry is leaving millions of consumers exposed.
But at least in Illinois, consumers may get urgently needed relief from legislation championed by Attorney General Lisa Madigan and State Treasurer Alexi Giannoulias, and backed by AARP and many other advocacy and consumers organizations.
House Bill 4781, sponsored by Representative Marlow Colvin and Senator Jacqueline Collins, passed the House with large bipartisan support. AARP urges the State Senate to pass this legislation and send it to the Governor for enactment.
“Older individuals tend to accumulate higher credit card debt, and often fall prey to unscrupulous debt settlement firms,” said AARP Illinois Senior Manager for Advocacy and Outreach, Nancy Nelson. “AARP has been working with Attorney General Madigan and legislators to pass this bill which will provide strong protections for individuals who need help to manage their debt, and which will prohibit deceptive practices.”
AARP surveys found that more than one in five debtors were over the age of 55; 27 percent of AARP members reported having difficulty paying off credit card debt; and nearly half – 44 percent – consider credit card debt to be a major concern.
Debt settlement companies typically advertise that they can settle all of a consumer’s credit card debt in 24 to 36 months for less than 60 percent of the amount owed. But what they are not telling consumers is that in the vast majority of cases most of the debts are not settled, even after all fees have been paid.
Industry data reveals that 1,000 debt settlement firms handle $18 billion in debt across the nation, with the average customer owing about $30,000 in credit card debt.
HB 4781 would protect Illinois consumers by, among other things:
- Prohibiting all up-front and monthly fees except for a one-time $50 application fee;
- Capping fees at 15% of the savings achieved from settling a debt;
- Prohibiting debt settlement companies from advising consumers to stop payments to creditors;
- Allowing cancellation of a contract at any time, with prompt refund of fees;
- Requiring debt settlement companies to be licensed and bonded by the state;
- Prohibiting deceptive promises through advertising or marketing, of specific debt reduction results.
I’m reminded about another similar situation that had an unintended consequence, the lawsuit by Comcast against the FCC about internet net neutrality. While Comcast won the case the may have lost the war. The AP story about this contained a great quote that seems apropos in this situation.
The more likely scenario, Scott believes, is that the agency will simply reclassify broadband as a more heavily regulated telecommunications service. And that, ironically, could be the worst-case outcome from the perspective of the phone and cable companies, he noted.
“Comcast swung an ax at the FCC to protest the BitTorrent order,” Scott said. “And they sliced right through the FCC’s arm and plunged the ax into their own back.”
Because the debt settlement industry could not properly regulate itself, new regulations will be impossibly severe, such as the inability for debt settlement companies to charge more than $50 as an up-front fee. I think this Illinois legislation may be the warm up swing with the ax that many states, with the help of AARP, are going to take.