Florida Attorney General Encourages FTC to Tighten Rules on Debt Settlement

The @GetOutofDebtGuy over at Credit, Debt, Life did a nice review of the Florida Attorney General’s efforts to change how debt settlement folks get paid. His letter to the FTC encourages the FTC to require debt settlement companies to only collect fees after services are provided.

Unlike credit counseling programs where consumers continue to make payments to their creditors, debt settlement services encourage the consumer to stop making payments. These moneys that would normally be paid to creditors are often reduced and then paid to the debt settlement company. These companies then negotiate settlements with each of the consumer’s creditors.

The Florida Attorney General along with the Attorneys General from Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Guam, Hawaii, Idaho, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Vermont, Washington, West Virginia, and Wyoming sent a letter to the FTC citing the following problems with debt settlement practices:

“The States’ enforcement actions provide ample evidence of the types of unfair and deceptive practices that financially distressed consumers encounter when they seek credit solutions via debt relief services. The primary consumer protection problem areas that have given rise to the States’ actions include: (1) unsubstantiated claims of consumer savings; (2) deceptive representations about the length of time necessary to complete a debt relief program; (3) misleading or failing to adequately inform consumers that they will be subject to continued collection efforts, including lawsuits, and that their account balances will increase due to extended nonpayment under the program; (4) deceptive disparagement of consumer credit counseling; (5) deceptive disparagement of bankruptcy as an alternative for debtors; (6) lack of screening and analysis to determine suitability of debt relief programs for individual debtors; (7) the collection of substantial up-front fees so the debt relief company gains even if it fails to perform; (8) lack of transparency and information for consumers as to payment of fees, status of accounts, and communications with creditors; (9) significant delays in active negotiation or engagement with creditors, coupled with prohibitions on direct consumer communications with creditors; and (10), in the case of debt settlement companies, basing savings claims (and settlement fees) not on the original account balance, but on the inflated amount due (including late fees and default rates of interest) at the time of settlement.”

Debt settlement folks, what do you think? Is it time to clean up the industry or is this an over-reaction to a few bad apples?

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