Paying for the Privilege to Pay

During the lead-up to BAPCPA, consumer advocates complained that the law's new credit counseling requirement was going to require consumers to participate in an industry that had some serious unsavory segments. While many credit counseling agencies are truly consumer-oriented, offering sound, free advice, others have been attacked for pushing debt management plans, which are credit-industry funded programs. The basic idea is that a consumer makes one payment to a DMP, which distributes the money to the person's numerous creditors. Someone recently asked me to look over the deal that an entity that she described as a "credit counselor" had put together for her to deal with a credit card obligation. Take a peek.

Notice anything? Check out the fees. The company estimates that it can settle the single credit card debt at issue here for 40% ($13,420) of the actual debt. For the privilege of paying this partial amount, the consumer is required to pay the agency $5,032.68. Indeed, the first 3 payments that the consumer makes, totaling $1,405.16, go straight to the agency and do nothing to pay down the debt. Even when some money starts being set aside for the real creditor, the agency keeps 47% of the first 20 monthly payments of $380 each.

This isn't a debt consolidation or management program, as it deals with each debt separately, and isn't affiliated with a credit counseling agency.  Instead, the for-profit company is what the FTC has termed a "debt negotiation program." The promise is that the company's team of "certified" debt arbitrators will negotiate for you to pay off a debt for less than the full amount owed. The FTC warns that these arrangements can be "very risky," cautioning that there is no guarantee that the creditor will accept the partial payment offered by the debt negotiation program and that while you are paying the debt negotiator (and not your credit card company) that the interest and fees on your credit card will continue to climb. Indeed, from this disclosure, I can't tell when a consumer can be assured that the debt settlement amount is fixed. But I'm guessing that if the "settlement" falls through the company keeps its $5,000 fee.

Comments

[James Byrum]

I have always viewed these companies as rip-offs. Some literally withdraw funds from the debtor's checking account without authority. Are any of them legitimate? Is there a place to find a list of those about whom complaints have been made?

[Diane]

What they obviously do not tell the consumer is that while those payments are going ONLY to the debt negotiation company, your credit is going into the toilet at an alarming rate. If the person had marginal credit to start with due to being over extended on credit, then this will drive them straight into the abyss of 7 years - or more - of worse credit ! Thanks to the heinous 'universal default' clauses, once those bills go unpaid, most, if not all, credit cards will start rate jacking and credit limit cuts. Once they do that, of course, the spiral gets worse when the start stacking on over limit fees and on and on.

These places can drive a person right to a bankruptcy lawyer's office - a place they may have ended up anyway - but the so-called "DMP" put them on the express train.

[Tim]

Debt settlement agencies are such a bad deal for consumers that they are specifically outlawed in several states.

[Katie Porter]

In response to Tim's comment, I located this helpful NCLC guide that lists the applicable state laws at pp. 15-16.

http://www.consumerlaw.org/initiatives/credit_counseling/content/DebtSettleFINALREPORT.pdf

[Frank]

To top it off who is to say that your creditor's will wait for this payment? It is going to take a long time to build up the funds to make a creditor an offer. During that time you will likely get sued and your wages garnished!

[Steve "The Debt Settlement Man" B]

As I can see Tim, you obviously do not know much about debt settlement. For many people debt settlement has been the savior from going into bankrutcpy, which actually will ruin your credit, due to being a public record. You see with settlement it is first not a public record which is huge, second the damage done is compeletly reversible, and third once your debts start to become settled it will have a very positive effect on your credit.

I see what you are saying though there are many unscrupulous debt settlement companies out there who do not have the client in mind but simply just want to make a profit. Just like any other form of debt relief you can look into.

For someone looking into a company whether it be settlement or consolidation should make sure the company has a good track record, and is not under any kind of investigation from the attorney general.

[Robert]

I can appreciate this post, but I feel that it's a cursory understanding of debt settlement at best.

Broad generalizations like: "They don't tell you that your credit will be in the toilet" are completely unfounded. Any reputable settlement company discloses the downsides of their program before anyone ever enrolls. Obviously we're learning that there are a number of "bad actors" within the industry that are preying upon desperate consumers, but most in the industry applaud any efforts to clean them out.