Fewer Than Ten Percent Get Out of Debt With Credit Counseling or Debt Settlement Companies

I previously wrote an article The Truth About The Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, and Bankruptcy. Some people scoffed at my findings and said they could not possibly be true, but they are.

Fewer than 10 percent of consumers completed their agreements with Colorado debt-settlement and credit-counseling companies, by either paying off or settling all of their debts, between 2006 and 2008, according to a report released Thursday by the Colorado attorney general’s office. Source

The state of Colorado has just released the results of their own survey.

Here is What The Colorado Attorney General Discovered

Colorado Attorney General John Suthers has released his office’s first annual report on debt management activity, which details the success rates, failure rates and fees of Colorado’s debt settlement and credit counseling businesses between 2006 and 2008. The data, collected from 42 Colorado debt settlement and credit counseling companies, reveals that less than 10 percent of consumers contracting with these companies since 2006 completed their agreements by either paying off or settling all of their debts.

“Colorado consumers in financial distress may be tempted by numerous advertisements from companies claiming to lower and eliminate debt,” Suthers said. “As our data shows, debt settlement and credit counseling are not quick fixes. Consumers should carefully consider all of their options, including directly reaching out to their creditors, before making any decisions to sign up with debt settlement or credit counseling companies.”

The data, gathered and published by the Office of the Attorney General’s Consumer Protection Section, is required by the Colorado Uniform Debt Management Services Act, which took effect Jan. 1, 2008. The law required that companies entering into debt management contracts with Colorado consumers register with the state by July 1, 2008, comply with applicable state laws and file annual reports with the Office of the Attorney General. The Uniform Debt Management Services Act also caps the fees credit counseling and debt settlement companies can collect from consumers, provides consumers with a three-day window to cancel their contract, and prohibits companies from engaging in false or misleading business practices.

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Credit counselors negotiate [Editor: they don’t actually negotiate.] with creditors to waive or lower interest, fees and payments. Consumers make monthly payments to the counselors that are distributed to creditors. Debt settlement companies contract with consumers to set up regular payments into a bank or trust account rather than directly paying creditors. The debt settlement company then uses consumers’ contributions to negotiate a lump-sum settlement of the debts.

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“If consumers contract with a debt settlement provider or credit counselor, they should ensure that the company is registered and complying with Colorado law,” Suthers said. “Consumers should be leery of any debt management plan that encourages them to stop paying their creditors altogether.”

The report also revealed that more than 10,000 Colorado consumers entered into debt management contracts during 2008. The average amount of debt owed by consumers was $21,050 for those in credit counseling and $30,788 for those in debt settlement plans. The average contract term was nearly 41 months for credit counseling and more than 32 months for debt settlement.

In 2008, consumers paid an average fee of $495 for credit counseling and $1,666 for debt settlement. (This amount does not reflect total contract fees as they are typically paid during the entire term for credit counseling and during the first half of the term for debt settlement.) By law, credit counseling fees may not exceed $50 per month and an initial $50 setup fee. Debt settlement fees are limited to 18 percent of the total principal amount of the debt at the time of the agreement.

“I am concerned with the high debt settlement fees allowed under the law,” Suthers said. “By paying a fee of 18 percent of the original debt amount, whether or not any settlements are achieved, consumers could end up paying substantial sums of money for little or no services. To better protect consumers, I favor legislation amending the law to allow collection of minimal monthly fees but no settlement fees until settlements are actually reached.”

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The 2008 debt management report, a list of registered credit counselors and debt settlement providers, and consumer information and complaint forms are available at: www.coloradoattorneygeneral.gov/dm.

Since the Uniform Debt Management Services Act took effect, the Office of the Attorney General has investigated and settled with 23 debt management companies and required them to refund more than $1.1 million dollars to Colorado consumers. The Office of the Attorney General continues to investigate and prosecute debt management companies that have failed to register with the state in accordance with Colorado law. Consumers with complaints about debt settlement or credit counseling companies should contact the Office of the Attorney General at 303-866-4494.

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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.
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