California is about to pass new legislation that will somewhat tighten the presently lax regulations on the debt settlement companies that are rapidly growing in number, as more and more Americans find themselves 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 dishonest and fraudulent companies that are getting the honest ones a bad name.
If and when the bill passes it will require debt settlement companies to verify that prospective debtors 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.
However, 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 debt settlement business is presently largely unregulated, and only about a dozen states have laws governing debt settlement, although a few states do 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 main difference between a debt settlement company and the majority of credit counseling services, is that the credit counseling service will more often than not try to assist the debtor to pay off all his debts, while the debt settlement company will attempt to come to some kind of agreement with the different creditors, in order to bring about an overall reduction of the amount 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 debtor’s 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) Money is deposited into a bank account that the debtor 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 total debt but might be a little more or less.
How Long Does The Process Take?
It normally takes around three years, and although some people manage to do it much more quickly, about 50% of people that sign up, fail to honor their commitments, and they end up filing for bankruptcy.
The Consumers Union and the Center for Responsible Lending would like fees to be based on the debt waived, not the total, but this would obviously discourage companies from working with smaller debtors.
Wesley Young, who is the legislative director for the Association of Settlement Companies says, “We don’t want to be in the position where we become a creditor (of the client.) It’s very difficult to get paid. This is a 36-month program. It’s very labor intensive. For us not to get paid until the program is complete, that’s a long time”.
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