85% of Debt Settlement Companies May Be Closing Soon and Taking Your Money With Them

There is no doubt that the workshops and hearings by the Federal Trade Commission (FTC) are going to result in changes that will significantly impact the debt settlement industry. The FTC has been carefully looking into the industry and is disgusted with the actions of many companies.

These would be the companies that charge large up-front fees to consumers, collect monthly payments from consumer where the first year or so is only payments for fees, or has no refund policy for fees paid but services not rendered.

The FTC is currently leaning towards imposing an up-front fee ban. Instead of debt settlement companies being allowed to continue to collect thousands and thousands of dollars from consumers they would be allowed to collect a nominal overhead fee, about $50 a month, but not be able to collect any commission from settling the debt until the debt was actually settled. It certainly sounds like a fair approach to me. And if you read the testimony of the respected consumer and financial services organizations that offered comments, they are all behind it as well.

But what really caught my eye was the October 26, 2009 testimony of the United States Organizations for Bankruptcy Alternatives (USOBA) when they said “an industry survey showing that an advance fee ban would drive the vast majority of debt settlement companies from the market and would cause some 85% to stop offering debt relief services to existing consumers.” Source

If 85% of debt settlement companies are already preparing to go out of business when this rule change passes, watch out. Why? It means they’ve collected millions of dollars in fees and have already spent it, unable to stay in business to service the accounts people have already paid or are paying fees for. The debt settlement companies took the fees when received, not when earned. As Michael Bovee of Consumer Recovery Network (CRN) said, “The current debt settlement industry is a massive Ponzi scheme.” And he’s right.

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It also means that all the consumers over the past few years that have been making monthly payments to debt settlement companies that have designated all or a majority towards fees and people will be simply out all that money when the debt settlement companies close their doors and go bankrupt themselves. Advanced fee restrictions are going to pass and potentially 85% of debt settlement companies, by their own industry admission are going to close their doors.

There are big changes coming in the debt settlement industry, changes that will better protect consumers from the bad apples of the bunch but watch out, cleaning up the debt settlement industry is going to get ugly, messy and a lot of people who are still working with debt settlement companies are going to lose a lot of money. That’s not the fault of the regulators, but of the debt settlement companies that charged massive up-front fees and never escrowed them to be taken when earned.

If you are currently working with a debt settlement company and they have a refund policy for you to recover fees you’ve paid I would suggest you strongly consider bailing for the debt settlement plan and get as much of your escrow and fees back now. Latter will be too late.


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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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