In a recent press release “Debt Settlement Companies on Life Support and Two US Senators Ready to Pull the Plug — Observations from Debt Resource Company, Dept Help and Beyond” (source) a company takes the approach that debt settlement needs to be preserved, the following two items caught my eye.
First, it’s probably not a great idea to misspell debt in the press release headline.
Second, it seems silly to partially quote the FTC Chairman in an effort to support debt settlement.
The press release by Debt Help and Beyond, whose site title is “Grab Your Debt Life Preserver In a Sea of Misinformation” said, “So who will have the final say on this issue? Only time will tell, but for now perhaps it is the Chairman of the FTC who says… “In my view, debt settlement can provide some real benefits for consumers.”
But here is what the FTC Chairman said in context, including his statement that he felt banning advance fees was prudent.
Finally, I believe certain practices should be prohibited in the debt settlement industry. In particular, debt settlement firms shouldn’t be allowed to charge any payment in advance of performing services for the consumer. This type of advance payment is already prohibited for credit repair services, and I think they should similarly be prohibited here.
In my view, debt settlement can provide some real benefits for consumers. For example, a debt settlement firm can advocate on the consumer’s behalf, especially in cases where consumers are reluctant, embarrassed, or even afraid, to contact their creditors directly. A debt settlement firm also may be able to provide individualized attention to consumers, taking a holistic approach to all of the consumer’s unsecured debt owed to several creditors, rather than just the amount owed to a particular creditor.
However, while I’m hopeful that debt settlement can help consumers, I also am concerned about certain practices we’ve witnessed among some industry players. To illustrate my concerns, I’d like to describe some law enforcement actions brought by the FTC in recent years. In these cases, the FTC alleged that companies and individuals offering debt settlement services engaged in unfair or deceptive practices, in violation of the FTC Act.
In March 2007, the FTC filed a complaint against Debt-Set, an affiliated company, and their principals who marketed debt reduction services online and in television and radio ads with claims such as “Reduce Debt Now” and “Stop Harassing Calls.” The FTC alleged that first, these defendants falsely promised to obtain lump-sum settlements, such as “fifty cents on the dollar” or “50 to 60 percent” of consumers’ total unsecured debt. Second, the defendants allegedly claimed that they would not charge consumers any up-front fees prior to obtaining the promised debt relief, when in fact the defendants charged a percentage-based fee – usually eight percent – of the consumer’s total unsecured debt before contacting any creditors. Finally, the defendants allegedly misrepresented that participation in the program would stop creditors from calling or suing them to collect debt.
In another case, FTC v. Dennis Connelly, et al., the FTC filed a complaint against five debt settlement companies and five principals engaged in a nationwide debt negotiation scheme. According to the FTC’s complaint, the defendants allegedly charged an upfront, non-refundable fee of up to 15 percent of the consumer’s unsecured debt. The FTC also alleged that the defendants failed to adequately disclose the likelihood that consumers would be sued, or that their account balances would grow, if they took the defendants’ advice and stopped paying creditors. Finally, the FTC charged the defendants with falsely advising consumers that if the program resulted in the addition of negative information onto their credit reports, that information would be removed upon completion of the program.
A third example is FTC v. Innovative Systems Technology, where the defendants allegedly promised to refund to consumers the fees they paid for debt settlement services if debt settlement negotiations were unsuccessful, yet failed to honor these promises.
Finally, in FTC v. Jubilee Financial Services, the FTC alleged, among other things, that the debt settlement firm falsely claimed to hold the consumers’ money in a trust account. According to the FTC’s complaint, the corporate defendant and its employees withdrew approximately 2 million dollars from the trust for unlawful purposes, without the consumers’ knowledge or consent.
I understand that the defendants in these law enforcement actions may not be representative of the debt settlement industry. But, I believe we can glean some lessons from these cases. I offer my suggestions on several industry practices that can be improved – as well as some that I believe should be prohibited.
First, debt settlement firms should limit their performance claims to those they can adequately substantiate. For example, a debt settlement firm should not advertise that it can successfully negotiate a consumer’s settlement down to only 50 percent of his or her unsecured debt, if the firm’s average settlements are closer to 80 or 90 percent of its consumers’ unsecured debt.
Second, debt settlement firms’ ads should not misrepresent the benefits of debt settlement. For example, they should not claim that the program will protect consumers from debt collection calls or creditor law suits if that is not true.
Third, debt settlement ads should disclose, clearly and conspicuously, the negative impact that participation in a program may have on a consumer’s credit score, and how long that impact may linger. This disclosure should not be made only in the written contract, but in the ad itself.
Fourth, if a debt settlement firm promises to refund debt settlement service fees to consumers if their debt settlement negotiations are unsuccessful, the firm must honor that promise. Moreover, if the refund is subject to certain terms and conditions, they should be clearly and conspicuously disclosed before the consumer signs up for the program.
Finally, I believe certain practices should be prohibited in the debt settlement industry. In particular, debt settlement firms shouldn’t be allowed to charge any payment in advance of performing services for the consumer. This type of advance payment is already prohibited for credit repair services, and I think they should similarly be prohibited here.
Also, in circumstances where the debt settlement program involves trust accounts for consumers, the firms should not be allowed to withdraw any funds from those accounts without the consumer’s express, prior written consent.
Ultimately, the goal should be that consumers have complete and accurate information about debt settlement, as well as other options such as credit counseling and bankruptcy, before they choose a course of action. – Source
Dooh!
I could not help but notice that the press release appears to have been sent out by David Bruce Hallenby who owns the Debt Help and Beyond website. That seems rather obvious by the Canadian telephone number associated with the release, the name and especially since the release does say “At Debt Help And Beyond we encourage consumers to do their own homework…”
But the release also says “When contacted, a representative of the independent consumer debt information site Debt Help And Beyond had this to say…” Dude, you can’t say you reached out to yourself.
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