The Sunday New York Times had a good story about the 2,000+ debt settlement companies in the United States and some of the controversy surrounding them.
Debt settlement firms market themselves as a solution for people with crippling credit card debt. The idea is that you pay the settlement firm to negotiate with the credit card company and consolidate all of your credit card payments into one monthly bill. In theory the total amount you owe is reduced and your repayment structure greatly simplified.
Unfortunately, practice is often different from theory. Since debt settlement companies oftentimes have large, percentage-based fees, you are essentially gambling that these fees will be less than the amount they are able to reduce your total debt by.
In one case highlighted by the Times, a debt settlement firm, Credit Solutions, ended up charging a West Virginia couple $3,825 in fees… with no results to show.
As a result of the general dissatisfaction with and increased usage of these companies services, complaints to state attorney general’s offices have been rising steeply:
State attorneys general are being flooded with complaints about settlement companies and other forms of debt relief. In North Carolina, complaints doubled last year, while in Florida they tripled, spokeswomen for the state attorneys general said. In Oregon, complaints have quadrupled since 2006.
The rapid rise of debt settlement is the result of two colliding forces: Americans owe more on their credit cards than ever, a result of the spending binge of the last decade. But as the recession deepens, their ability to pay is declining.
Kaulkin Ginsberg, a consulting firm, estimated that the amount of consumer credit at risk of default increased in February by $5 billion, to $24.5 billion.
Interestingly, even credit card companies and debt collection agencies dislike debt settlement firms as much as consumer rights groups:
An executive of the American Bankers Association, representing the credit card industry at a recent forum, labeled debt settlement companies “very harmful” to both creditor and consumer. Even debt collectors are upset, saying the settlement companies prevent them from collecting.
The lesson here is a familiar one for frequent readers: use your credit card responsibly, minimize unnecessary spending, and pay back your loans as quickly as possible.
(Read more Econ4U posts about credit cards here.)
