New Laws Addressing Debt Settlement Company Practices

Debt settlement companies have long been criticized for their practices that are seen by consumers and the government as predatory and deceptive. As the number of complaints continues to rise, some states have decided to address the problem by passing new laws that restrict debt settlement company practices and the fees charged. The laws establish rules of accountability that benefit consumers.

The ongoing consumer complaints have unveiled practices that are clearly designed to take consumer money for few services, if any. The companies claim they can help consumers pay off their debts for pennies on the dollar. What the companies often do in practice is collect fees and pay themselves first leaving little or no money to pay down consumer account balances.

The debt settlement companies usually charge an upfront fee just for joining the program and then also charge monthly processing fees. There are no guarantees that the consumer will actually see debt settlement or even account reductions if monthly payments are not enough to pay anything on their consumer accounts after paying the fees to the debt settlement companies.

Deceptive practices attributed to debt settlement companies include the exorbitant fees but also failing to provide services as advertised. Upon investigation it has been discovered many of the companies never contact a consumer’s debt collectors to arrange for reduced payments or to negotiate settlement. In the meantime, consumers are told to end making payments to creditors so the money goes to the debt settlement company.

In other words, the settlement companies are not settling anything. Now there are a number of states taking the offensive and introducing new laws that protect consumers from fraudulent advertising and excessive fees for services never rendered.

For example, in Oregon the state has passed Bill 2191 which limits the upfront and ongoing fees a debt settlement company can charge and collect. The law also stops false or misleading advertising and requires better consumer notification of account terms. Also included in the bill is a requirement that the state Department of Consumer and Business Services oversee the debt settlement companies that are now required to register with the agency.

Illinois is another state that has passed new legislation that limits debt settlement company practices. The Illinois bill prohibits debt settlement companies from collecting fees when no services are rendered. The fee can only be collected after debt is actually settled. The companies can charge a maximum $50 up front fee and a maximum 15% of the savings the company helps the consumer realize.

Other states like Minnesota already have laws on the books limiting debt settlement company practices. And just as important is the fact that these states are pursuing the debt settlement companies that violate the laws. Minnesota is pursuing six debt settlement companies in several states that sold services to Minnesota consumers claiming they violated Minnesota’s law.

The debt settlement companies surviving on fraudulently charged fees will probably not survive. For consumers that is good news. Like predatory lenders, some debt settlement companies prey on those least likely to understand what they are purchasing.