In recent years NILA members have had to expend significant resources on managing the influence of so-called “debt-settlement” companies (DSCs) which claim to settle, renegotiate or in some way change the terms of a person’s debt to a creditor.
“Debt settlement companies may well leave you further in debt than when you started.” CFPB Website
These companies have been the focus of many enforcement actions by the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC), due to the untold damage the cause to borrowers through actions which, if not outright illegal, are unethical and morally indefensible.
NILA applauds the CFPB’s recent action and associated $25 million penalty in regard of a DSC, after allegations that the company illegally charged people in advance of debt-relief services and billed debtors without actually settling their debts, charging fees—sometimes thousands of dollars—even when borrowers negotiated settlements with their creditors on their own.
The reality is that DSCs do not provide any service that the consumer could not achieve by working directly with the creditor. Furthermore, their methods cause more harm to borrowers than good.
Common to all “debt-settlement” firms, is the catastrophic advice to distressed borrowers that they stop paying creditors and instead build up a savings account with the promise of paying off a reduced version of their debt.
This irresponsible tactic often increases the size of the loan, with no guarantee that loan terms will be improved or an accommodation reached with the lender.
Unless the debt settlement company settles all or most of the consumer’s debts, the built-up penalties and fees on unsettled debts can amount to significantly more than the savings the borrower can get from a settlement.
“Debt-settlement” companies operate by charging significant fees for their services – often 20% to 25% of the debt owed.
Consumers who follow this advice and stop sending payments directly to their creditors suffer significant damage to their credit report, reducing their future options for credit and increasing its cost.
DSCs have even been known to use a Power of Attorney to ensure that they are the only ones able to communicate with borrowers.
Even in very best-case scenarios, these methods can leave borrowers no better off than they were previously. It now transpires that some DSCs are taking further advantage of vulnerable consumers by offering them fee-based loans to finance their settlements and ensure payment of fees, essentially encouraging negative payment behaviors in order to profit.
NILA members are committed to working with their distressed borrowers to settle a borrower’s debt without additional charges. “Debt settlement” companies detract from this time-tested process. Borrowers should understand that lenders themselves offer the safest and most effective routes out of debt.