Debt Negotiators May Offer Little Help as Bills Bury Consumers

Debt Negotiators May Offer Little Help as Bills Bury Consumers

http://www.bloomberg.com/apps/news?pid=20603037&sid=aMgSZ347XLBM&refer=home

By Jamie McGee



May 29 (Bloomberg) -- Ulish Hopkins, a former bus- dispatcher from Chicago, turned to a debt-settlement company last year after piling up about $30,000 in credit-card bills. Seven months later, he owed close to $40,000.

Hopkins says the company told him it could reduce his bills by about 50 percent through negotiations with lenders. He was told to stop paying creditors and to put monthly payments in an escrow account, which the firm used to cover its fees. Instead of reducing his bills, interest and late fees raised his indebtedness and damaged his credit score.

“They never told me that the money I was paying wasn’t going to my debt, it was going to them,” said Hopkins, 59, who quit work in January 2008 after a brain tumor led to surgery. He now receives $1,539 a month in disability checks. “You are better on your own.”

Credit-card delinquencies are at record highs, according to Fitch Ratings, and the U.S. unemployment rate of 8.9 percent is the highest since 1983. As more consumers fall behind on bills, settlement companies often end up adding to the debt burden rather than offering a cost-saving solution, said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling in Silver Spring, Maryland.

“There has been significant growth in the debt-settlement industry based on the economic decline,” Cunningham said. “People are financially distressed and when that happens, the unscrupulous among us seem to come out in droves.”

Sued for Fraud

Wesley Young, legislative director of the Association of Settlement Companies, a Madison, Wisconsin-based lobbying group, said there are probably more than 500,000 customers of as many as 1,000 debt-settlement companies. The association, which includes about 30 percent of the industry, requires members to disclose payment plans and credit-score risks upfront, he said.

New York Attorney General Andrew Cuomo has begun a national investigation of settlement companies, and has sued two for fraud and false advertising. Illinois Attorney General Lisa Madigan has also filed two lawsuits against debt-settlement companies, alleging they “engage in deceptive marketing practices” and “do little or nothing to improve consumers’ financial standings.” Texas Attorney General Greg Abbott sued a debt settlement company in March, saying it engaged in “deceptive and misleading acts,” according to court documents.

Charge-Offs

Charge-offs on credit cards, which are loans banks don’t expect to be repaid, rose to 9.01 percent on average in April, from 5.24 percent a year earlier, according to data compiled by Bloomberg. Credit card payments more than 60 days past due climbed to a record 4.4 percent in April, and have increased 35 percent in the last five months, according to Fitch’s delinquency index.

Debt-settlement companies often charge fees based on a percentage of debt, with rates typically ranging from 13 percent to 20 percent, according to the credit-counseling foundation.

Michael Kerr, legislative director of the Chicago-based National Conference of Commissioners on Uniform State Laws, said his organization has promoted the Uniform Debt-Management Services Act, which requires debt settlement and credit- counseling companies to register and disclose potential risks and methods. Utah, Rhode Island, Delaware and Colorado have passed variations of the bill.

“It’s in their best interest to weed out those bad actors if they want their industry to survive,” Kerr said.

Kerr said debt-settlement companies can make sense for a “narrow category” of consumers, such as those who don’t want to negotiate with creditors on their own behalf or pay a lawyer.

Credit Counselors

Credit-counseling agencies and debt-management plans are options to using debt-settlement companies, Cunningham said. Credit-counseling agencies offer education on managing debt and review a consumer’s finance options. They also set up debt- management plans to work with a creditor to reduce interest rates and late charges while the consumer pays a balance in full over an extended period of time. Start-up fees shouldn’t exceed $50 and monthly fees should be about $25, according to the credit-counseling foundation.

The foundation recommends consumers choose certified credit counselors and non-profit counseling agencies that are affiliated with groups, such as the foundation, with ethical and financial standards.

Bankruptcy may be a better option for consumers who can’t afford debt settlement or debt management, Kerr said. “There are some people who really should go to bankruptcy and not bleed out their remaining savings and pay fees to these third parties,” he said.

Bankruptcy Changes

Changes to the bankruptcy law in 2005 make it more difficult for debtors to qualify and have increased the need for third-party negotiators, said Young at the Association of Settlement Companies. In some cases, bankruptcy is recommended to borrowers when a debt-settlement program would lead to a negative budget. “If they can’t afford the program, they should consult a bankruptcy lawyer,” he said.

Hopkins was paying $600 a month to Debt Relief USA Inc., a bill that he said eventually totaled $4,200. Addison, Texas- based Debt Relief USA is one of the companies being sued by Illinois’ Madigan.

When JPMorgan Chase & Co. put liens on Hopkins’s property and took him to court for non-payment, Debt Relief USA said they needed another $600 before his money would go toward negotiation, Hopkins said. Officials at Debt Relief USA didn’t return calls for comment. Gail Hurdis, a spokeswoman for JPMorgan’s Chase Card Services, said in an e-mail that she wasn’t able to discuss customer accounts.

Hopkins said he received a $2,000 refund through Madigan’s office from Debt Relief USA and closed his account with the company. When he first heard the company’s advertisement on radio, Hopkins said he was current on his bills. Now, with $25,000 left to pay off, he said he is too scared to check his credit score.

“I don’t use credit cards anymore,” he said. “I’m already in the hole, I don’t want it to be dug deeper.”

To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.net;
Last Updated: May 29, 2009 00:01 EDT

 

Why even bother when CC companies themselves or their subsidiary collection companies will offer to settle things.

Of course just make sure it's reported right afterward