“A Business Model Based on Deceit”: How Debt Relief Companies Fleece Consumers (Part 2)

1064376_sad_boy_with_the_coins.jpgHere’s how the FTC describes the debt-relief firm’s typical modus operandi:

Some debt settlement companies claim that they can arrange for your debt to be paid off for a much lower amount – anywhere from 30 to 70 percent of the balance you owe. For example, if you owe $10,000 on a credit card, a debt settlement company may claim it can arrange for you to pay off the debt for less, say $4,000.
But there is no guarantee that debt settlement companies can persuade a credit card company to accept partial payment of a legitimate debt. Even if they can, you must put aside money for your creditors each month and pay the hefty fees debt settlement companies charge before they settle any of your debts. On top of that, you may have to pay a final fee to a debt settlement company that’s a percentage of the money you’ve supposedly saved. Meanwhile, it may be months – or even years – before the debt settlement company negotiates with your credit card company to settle your debts. And, if you stop making your payments in the meantime, the credit card company usually will add late fees and interest to the debt each month. That can cause your original debt to double or triple. All these fees will put you further in the hole.

Word to the wise: Do it yourself. Do a budget. See what you can afford to pay. Call your creditors and see what you can negotiate. If you need help, try a nonprofit credit counselor, particularly one approved by the federal government for pre-bankruptcy credit counseling. The list is available at the US Department of Justice website at “List of Credit Counseling Agencies Approved Pursuant to 11 U.S.C. § 111.”

Meanwhile, the industry continues to propagate misinformation and, unfortunately, the press continues to pass it along.

Reporting a statement by David Leuthold, executive director of the Association of Settlement Companies, a July 30, 2010 Washington Post article by Ylan Q. Mui, states: “The average customer has about $30,000 in credit card debt. These borrowers cannot afford a debt-consolidation plan but do not qualify for bankruptcy, Leuthold said.”

The truth is there are very, very, very few cases where a person does NOT qualify for bankruptcy, e.g. where he lied to the court in a prior bankruptcy and his case was dismissed by the judge with prejudice to re-filing for a stated period time, or he got a discharge in a prior bankruptcy within a certain number of years under the new law. Those are isolated cases.

The real question is WHAT type of bankruptcy the person qualifies for: Chapter 7, 13 or 11. In each there is a discharge.

The debt settlement companies love to propagate this confusion to scare people away from getting relief under the law and instead drive them into the arms of these hucksters.

The same article reports the trade association executive predicting the new rules on advance fees will cause many of the debt relief companies to go out of business. Maybe that would not be such a bad thing.

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