It’s hard to believe the number of radio ads and TV commercials hawking debt settlement services. Many of them falsely create the impression that the debt settlement services are part of a federal program.
Now the Government Accountability Office and the Federal Trade Commission have concluded that the great majority of debt settlement firms have misled consumers. The report was issued last week and it was extremely critical of the debt settlement trade.
The government reports indicated that many of these firms made false and misleading claims that they were affiliated with federal stimulus programs. They also exaggerated their ability to obtain settlements.
Debt Settlement Companies Are Becoming a National Problem
In the past five years, the number of debt settlement companies across the country has ballooned to over a thousand. I’ve written extensively about the problems with debt settlement companies during the past year.
See: Debt Settlement Industry Criticized by New York Times , in which the New York Times stated, The common complaint is that debt settlement companies are more interested in helping themselves earn fees than aiding their beleaguered clients.”
Also See: New York Commences Nationwide Investigation Into Debt Settlement Industry — Many Offers to Eliminate Credit Card Debt are False and Misleading .
The GAO study also concluded that debt settlement companies lied about their success rates. Apparently, many companies falsely represented that their success rates were 85 to 100 percent. However, the FTC concluded that the rate is less than 10 percent.
The report also pointed out how debt relief companies rip off consumers by charging hefty up-front fees before they perform any services.
Consumers Who Hire Debt Settlement Companies Often End Up Filing for Bankruptcy
As a Long Island bankruptcy attorney, I regularly see the fall-out when consumers are taken advantage of by debt settlement companies. They come to me when their debt settlement plan fails, which is inevitably after they’ve paid significant funds to the debt settlement company without accomplishing any results.
However, they could have saved a great deal of money had they considered bankruptcy in the first place.
There is a Major Distinction Between Debt Negotiation and Debt Settlement
The services offered by debt settlement companies are very different from debt negotiation services offered by certain law firm such as my own. With debt settlement companies, the consumer makes monthly payments to the company, and the company first applies these payments to their own fees before any settlement is actually made.
Debt settlement companies will often sign up consumers who they know, or should have known, would not be able to complete the program. What’s more, the companies keep the fees even when services are not provided!
Debt negotiation offered by attorneys, however, is much different and involves negotiating settlements with the creditors. The client typically does not pay any advance fees, other than an initial retainer.