At the time of writing, California is on the verge of passing a state bill that would further regulate the rapidly increasing debt-settlement industry, which continues to grow as more and more Americans become unable to pay their debts.
The bill, which was sponsored by Assemblyman Ted Lieu, D-Torrance (Los Angeles County), has the important backing of the industry’s two main trade groups, who say that the industry needs to be freed from the few dishonest and fraudulent companies that are getting the honest ones a bad name.
If passed, the bill would require debt settlement companies to ascertain that prospective clients are qualified for the program before enrolling them, but Gail Hillebrand of the Consumers Union says;
“We think that is too weak of a standard. It would be like saying if you have a pulse you are qualified”, and her group wants companies to make sure a consumer is both “suitable” and “able” to benefit from the program.
Caryn Becker, who is a policy counsel with the Center for Responsible Lending, says her group would settle for a fee based on the debt brought into the program,
“If it was 4% spread over the first six months and 18% (including the 4%) spread over the first three-quarters of the program.”
The Difficulties Explained
The business is presently largely unregulated, and only about a dozen states have laws governing debt settlement, although a few states have pending bills.
A seeming problem with getting the present bills passed is that many companies are totally legitimate, and many are BBB (Better Business Bureau) recommended, and states don’t want to regulate the good guys out of business, and particularly because the Bankruptcy Act of 2005 has made it harder for consumers to file to discharge their debts in court.
What Is Debt Settlement?
The major difference between a debt settlement company and most credit counseling services, is that a credit counseling service will most often attempt to aid the debtor to pay off his debts as they stand, whereas a debt settlement company will attempt to come to an agreement with the various creditors, which results in a lowering of the amounts owed.
Debt settlement, if done properly can be beneficial to both the creditor and the debtor, because the creditor gets a large amount of his loan back without forcing the debtor into bankruptcy, and the debtor gets his debt reduced by often as much 40-50%.
Debt settlement does damage the debtors credit score, but nowhere near as much as bankruptcy would.
How Does Debt Settlement Work?
a) The debtor enters into a multi-year agreement.
b) Stops making payments.
c) Puts the money into a savings account that he/she controls.
d) When the savings account is funded, the debt settlement company negotiates with the creditors and offers them a lump sum, which is considerably less than what is owing.
e) When, and if the debtor has paid all creditors, if there is still money in the savings account, then it must be refunded.
f) Debtors who fail to complete the program, forfeit the money that is on deposit.
How Much Does It Cost?
The debt settlement company generally charges a percentage of the debt that is owed, and it will most often be between 15 and 20% of the debt but might be a little more or less.
Tags: Bankruptcy Act, Consumers, debt settlement, Fraudulent companies