Tuesday, November 17, 2009

debt settlement changes

In an attempt to limit a viable solution for consumers struggling with debt, financial institutions are pressing the Federal Trade Commission to set strict rules for debt settlement firms under amendment 16CFR Part 310, commonly known as the "Telemarketing Sales Rule".

According to the National Association of Attorneys General, in the past five years, 21 states have sued 128 debt-relief programs. Several Attorney Generals have launched investigations into firms alleging deceptive business practices. In its effort to protect consumers from abuse, the FTC is proposing an amendment to combat "false promises" by requiring firms to better disclose the debt settlement process and limit the firms abilities' to charge up-front fees.

Debt settlement firms are notoriously bad at the financial calculations involved in the process. Since most firms use the "reduce debt by 60%" marketing message, counselors will often use the original debt balance provided by the consumer and apply that ratio - knowing full well that the creditors will add penalties, fees, and interest to that amount. Creditors negotiate starting from the inflated balance, typically increasing by 25%, and in rare cases even more, resulting in consumers paying a larger dollar-amount settlement than originally expected estimated.

At the root of this problem is the unregulated nature of the fast-growing industry. Unlike debt collection companies, which are heavily regulated, most firms operate without established policies and procedures that ensure the accuracy and consistency of services offered. The reality is that many debt settlement programs regularly fail to provide the services promised resulting in regulators and consumer confidence to dramatically declined.

To discredit the debt settlement industry, financial institutions along with collection agencies, collection attorneys, and consumer credit counseling agencies have been claiming that the industry is "illegal and unethical." Credit card companies and bill collectors have gone as far as telling consumers struggling with debt, that they don't settle with third parties. These agencies work together to ensure that loans are repaid.

As a debt-relief advocate, I assure you that creditors are motivated to accept settlement offers after an account has been in delinquency for a period of time. If the consumer is in default on multiple credit obligations, lenders are further motivated to settle quickly before any available money has been paid to other creditors.

I believe the controversy surrounding debt settlement can be resolved by preventing unscrupulous firms from taking advantage of vulnerable consumers and, effective immediately, prevent credit card companies from reneging on contract agreements with its customers. Most consumers aren't suited for debt settlement. Many who attempt it eventually file for bankruptcy protection from relentless creditors as a last resort. I believe change is needed to protect consumers. In debt settlement, it takes time to see results, nothing is guaranteed, and it takes one creditor to ruin a program underway.

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