I owe a tremendous debt of gratitude to Rita Augusta, a former owner and executive with Morgan Drexen, the debt settlement company who went on to be shutdown by the Consumer Financial Protection Bureau. Rita not only was brave enough to share the valuable advice below about lessons learned for consumers, but she also assisted the CFPB in their case.
People can be as critical as they want to about Morgan Drexen but I would like to celebrate the wisdom of her advice below to help consumers. She speaks from real world experience and that kind of advice is invaluable to readers.
People will never know how many times I’ve asked former executives to come forward and not waste a perfectly good mistake by sharing lessons learned. Rita honored that request. [Insert applause.]
Settling Debt ‘What to watch out for’
By Rita Augusta
Debt can be a real source of unmanageable stress for all of us. How does one choose the right solution or debt settlement company? For many, the wrong choice can make a bad situation horribly worse. Having worked in the debt relief industry for over 10 years, I’ve seen the good, the bad, and the fraud. I hope by sharing some of my knowledge and insight, consumers will be better equipped to make good decisions when seeking relief from their debt.
1. Be wary of attorney debt settlement firms. They designed their models to avoid non-attorney regulatory agencies, such as the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB), not to get you the best settlement. Many laws protecting consumers from poor business practices do not apply to attorneys. There are numerous legal battles on the authority civil agencies have over attorneys who are governed by their state bar. There are many holes in that defense; however, there is little benefit to a consumer to hire an attorney. Unless you are expecting to file for bankruptcy, you should explore all options in advance.
2. Prior to entering into any contractual obligation, carefully read any contracts they require you to sign. The contract must detail the payment agreement and any associated fees. Furthermore, never provide your banking information before entering into an agreement. If you decide to proceed with debt settlement services, send a voided check with the signed contract. If they deviate from the contractual payment agreement by changing payment amounts and/or dates (with the exception of next business day scenarios), and without your request or approval, they are in violation of electronic payment laws and your contract. There may be instances where they request additional funds from you to make a new settlement offer. Ensure they provide written documentation detailing the amount needed and where those funds are to be paid.
Follow the recommended steps and do not let anyone rush you. Cutting corners only benefits the debt settlement firms and creditors. The squeaky wheel always get the most attention. So let them know you will hold the firm accountable to their contractual obligation.
3. Ensure the creditor claiming you owe the debt validates the debt. This means they can prove you owe the debt, they have a legal right to collect it, and most importantly, they consider the debt resolved once you make full payment. Validation requirements vary from detailed statements of all charges to a contract you signed with the original creditor. For more information on debt validation, visit the following link for a description of what you will need.
4. Every state has a statute of limitations, which is determined by the state you reside in, not the creditor. Determine the date of the last payment you made on the debt you are trying to settle. [You can often find this on your credit report, which the debt settlement company should provide you or by the credit bureau when requested.] The time starts when the account goes into default (typically, 30 days after the first missed payment). If the debt is older than the statute of limitations, they have no legal recourse. This is why creditors will push you to send them any payment. Once you send any payment amount toward the debt, the clock on the statute of limitations resets and that protection you had disappears (an example of why one lump sum payment is the best option when settling debt). For more details on the statute of limitations, visit the this page.
5. Whenever possible, pay the settlement in one lump sum. For most people with a financial hardship, multiple payment settlements sounds great. However, you will often get a lower settlement if you can manage to offer one lump sum. Additionally, creditors can be unethical and in a multiple pay settlement, they will make the last payment nominal and suspiciously, the last payment you send the creditor never seems to receive. Because of this, you are in default on the settlement agreement, all previous payments you made on the settlement are credited toward the original principal balance, and you are still legally responsible for the entire remaining balance.
6. Require that you must review and approve all settlement agreements before they submit settlement payments. Legally, they must receive your authorization in advance. If they do not, you are not legally required to pay them a [settlement] fee. The agreement should clearly state who owes the debt, the original debt amount, additional fees, the original creditor, the original account number, the collection agency name, address, phone number and account number (if different than the original creditor). The agreement needs to state the party collecting the debt has a legal right to collect that debt and that the debt will be paid in full/paid as agreed once full payment has been received. The creditor will report this to all 3 credit reporting bureaus within 30 days of the final received payment. Request a letter stating the debt has been paid in full with your last payment. This will be of value if future issues with the debt arise.
7. Require the debt settlement company you contracted with to provide a copy of the following: all settlement agreements, copies of checks or wires to the creditor on your behalf, documentation used to validate the debt (reference item 3 above), an itemized statement of payments to creditors and fees charged/collected by the debt settlement company. Request these items after each debt is settled. Do not wait until all debts are settled. Never lose this documentation. [You may have to report any of the unpaid debt as income on your tax return. Consult your tax advisor about tax implications of settled debts. Ask about the fees you paid associated with the settlement of the debt and the possibility of offsetting your reporting of earned income.]
8. Notify all 3 credit bureaus of the settled account. Debt settlement companies may tell you this is the creditor’s responsibility. You should not rely on the debt settlement company’s advice, as negative information on your credit report only affects you. In most cases, if the debt is older than 7 years since the last payment was made, notify the credit bureaus that it needs to be removed as it exceeds the reporting statute of limitations for credit reporting (this statute is different, and in most cases longer, than the statute to collect addressed in item 4 above).
Follow these steps to ensure a more positive outcome. Carefully read the contract before you sign it or give anyone your bank account information. You have to keep on top of what is happening. Call the debt settlement company for weekly updates on their progress with your debts. If they are not performing as agreed, cancel immediately, send a detailed letter of your experience, and demand a refund. If no settlements have been reached, they cannot legally charge/collect any fees. They must return all funds collected as soon as reasonably possible (within 15 days is more than reasonable). You should cancel in writing and always follow up by phone. Keep a detailed log of when you called, the representative you spoke with and details of the conversation.
Lastly, you can [and should] attempt negotiating with your creditors on your own before hiring a debt settlement company.