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.
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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.