For someone deep in debt, the offer may sound like a lifeline: Send payments to a debt settlement company and it will negotiate with your creditors to get them to reduce what you owe by as much as half -- without declaring bankruptcy.
But if it sounds too good to be true, that's because it probably is. Complaints to the Maryland Attorney General's office about companies making offers like that have spiked in recent years as consumers have found too often that they wind up paying exorbitant fees and getting no benefits -- all while their debts continue to mount and their credit scores plummet. Unlike non-profit debt counselors that help people negotiate manageable payment plans with their creditors, bad actors in this unregulated industry are making money off of the financially desperate. The legislature, which is holding a hearing on a bill to regulate the debt service industry on Thursday, needs to take action.
Here's how the business is supposed to work: The debtor sends payments to the service company and, when a sufficiently large amount is in his account, the company contacts his credit card companies, banks or other creditors and attempts to persuade them to take a lump-sum payment and forget the rest of the debt. But, according to advocates for regulation, including Attorney General Douglas F. Gansler, there's a catch: The companies don't actually contact the creditors up-front to agree on such an arrangement, and there's no guarantee they'll accept a lower payment.
Meanwhile, consumers often stop making regular monthly payments to their creditors while they're sending money to the debt settlement company, not realizing that the creditors aren't on board with the plan. Sometimes the debt settlement companies actually advise them to stop making payments and stop talking to their creditors. That means their liabilities just continue to grow from interest and fees, and their credit scores to decline from the missed payments. Creditors keep calling and trying to collect. What's worse, initial payments often go toward paying the company's fees, not toward amassing capital to pay down debts, and consumers who realize what a raw deal they've gotten have little recourse to get that money back. New York Attorney General Andrew Cuomo last year launched a nationwide investigation into debt settlement companies and found that they rarely delivered on their promises but more often left their customers deeper in debt.
The bill being considered in the House and Senate would require debt settlement companies to disclose the limitations of their service, to limit their fees to no more than 15 percent of any actual reduction in debt and to stop making claims about how much customers can save. The legislation would allow companies to charge a $50 fee to set up an account but would prohibit them from collecting more until the service is successfully completed. Given the damage these kinds of companies can do, the Maryland General Assembly would seem entirely justified in outlawing this business practice altogether. The proposed regulations, by contrast, seem downright generous.