Giannoulias bill targets debt scams
Proposed regulations cuts costs, protects consumers

October 5, 2009

State Treasurer Alexi Giannoulias is proposing legislation to crack down on debt settlement companies that prey on consumers who are drowning in credit card bills.

The economic downturn has spawned the rapid growth of debt settlement companies nationwide that claim they can help a distressed borrower avoid bankruptcy by negotiating to pay off their debt for pennies on the dollar.

However, debt settlement firms often cause greater financial harm by charging excessive fees, driving the customer deeper into debt and ruining their already vulnerable credit rating, Giannoulias said.

“Debt settlement companies claim to be a lifeboat for people drowning in debt,” said Giannoulias, noting that such companies advertise heavily on the web and cable television with promises to shrink credit card balances. “But their deceptive practices put consumers on a sinking ship toward bankruptcy.”

Debt settlement companies instruct customers to stop sending payments to their creditors and instead pay into a special account controlled by the company. Once enough money accumulates in the account, the settlement company contacts the creditors to negotiate a lump sum payoff amounting to less than what is owed.

Nothing prevents the credit card companies from pursuing payment from the consumer during the accumulation period. They regularly report consumers to collection agencies and take legal action to have wages garnished as interest and late fees add up and credit scores plummet.
 
Because it can take several years before a settlement is reached, an overwhelming majority of consumers drop out their plan, leaving them in a worse financial situation than before. If consumers do complete a settlement, they must pay taxes on the amount saved.

“In their struggle to become debt free, some families are being duped by the exaggerated claims of some unscrupulous debt settlement companies,” said Chris Honenberger, CEO of ClearPoint Credit Counseling Solutions, a national non-profit credit counseling service with several locations in Illinois. “Clear disclosures that educate consumers about what they are agreeing to will help them protect themselves at a time when they are most vulnerable.”

“Debt settlement companies are a real problem for everyone and reform is needed to protect consumers,” said Cate Williams, vice president of the non-profit credit counseling agency Money Management International (MMI), which is part of Consumer Credit Counseling Service (CCCS). “Clarity is the word of the day for consumers.”

Giannoulias will propose legislation for the General Assembly that would regulate the debt settlement companies and set strict rules on how they operate to protect consumers. The proposed legislation would:

• Require debt settlement firms to acquire a license and prove they are operating legitimately.

• Cap fees at $50 upfront and at $30 per month. Settlement companies could collect additional fees but only for services rendered based on a percentage it saved for the consumer (not on the initial debt).

• Prohibit debt settlers from advising consumers to stop paying their bills.

• Require consumers to sign a document written in clear language, stating they are aware of the consequences of using a debt settlement firm.

• Allow consumer to cancel their contract at any time and receive a full refund if terminated within the first 90 days.

• Require settlement companies to provide every consumer with monthly statements, revealing how much money was collected and what percentage was for fees and paying down debt.

Violations of the law would result in a Class 4 Felony, punishable up to $5,000 per instance.

“The Department is glad to be collaborating with Treasurer Giannoulias on this important issue,” said Brent E. Adams, acting secretary for the Illinois Department of Financial and Professional Regulation (IDFPR), which regulates the state’s banking system and financial institutions. “Consumers who seek assistance with their debts are, by definition, in a vulnerable financial state and need protection from financial predators.”

With today’s uncertain economy and rising unemployment rates, debt – and where people turn to pay it off – is a mounting problem, Giannoulias warned. Americans carry nearly $2.5 trillion in consumer debt, up 20 percent just since 2000, according to the Federal Reserve. The average household’s credit card debt is $8,329, up almost 15 percent from 2000.

This year, Illinois Attorney General Lisa Madigan has sued three debt settlement companies – California-based SDS West Corporation and Texas-based Debt Relief USA and Credit Solutions of America – for engaging in deceptive marketing practices and charging excessive fees and failing to improve their clients’ financial situation.

For people who are in debt, Giannoulias recommended that consumers try to negotiate a lower interest rate and payment plan directly with their creditor. In addition, there are other non profit options for consumers, including programs run by debt management firms, which are regulated by the state and prohibited from charging excessive fees or instructing clients to not pay their monthly bills.

Giannoulias advised individuals looking for debt relief to seek out the services of one of the 84 licensed debt management providers in Illinois, which are already regulated by the state and do not advise consumers to stop paying the creditors or charge excessive fees.

Credit managers negotiate with creditors to make balances current, reduce monthly payments and lower interest rates. The goal is to payoff debt within five years, improving consumers’ credit scores.

“We see many people who have been with a debt settlement company but drop out after they get sued,” said David Hill, the credit counseling coordinator for Chestnut Credit Counseling Services, which provides debt management services across the state. “We work to improve their credit and save them money so they don’t have to resort to bankruptcy.”