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Charlene Crowell NNPA Financial Writer
Published: 31 March 2010

(NNPA) - At a time when many Americans are wondering how or when their household finances will improve, debt settlement, an emerging form of consumer debt-related services, is actually in a growth mode. And once again, communities of color are being preyed upon.
On urban radio stations across the country, commercials seek consumers who are "at least $10,000 in debt." The pitch is that help is available to negotiate individual debts to a fraction of the amount owed. What the commercials do not advise is that most debt settlement companies charge large up-front fees to establish an account and then assess customers monthly fees as well. These fees are either held by the debt settlement company or by an account controlled by the settlement company.
These businesses also typically urge consumers to stop paying their creditors and instead make payments to their company. The theory is that armed with substantial funds from consumers, the debt settlement firm is in a better position to "negotiate" with the creditor. On average, it takes at least a year for consumers to build up enough funds to make a feasible proposed settlement. For consumers with large debts, the amount of time needed to build a substantial settlement offer could be three years or longer.
The problem with this business model is that it requires payment for services that may or may not ever be rendered. As a result, business profits are assured because fees are owed regardless as to whether or not the firm provides any service. There are no refunds on fees. And not only do most consumers wind up in deeper debt than when they first contacted a debt settlement company, the overwhelming majority of customers cancel participation prior to completion.
The highly suspect practices of debt settlement firms also lead to more problems with creditors as well. Without timely or regular payments, creditor debts earn penalty fees beyond the amount of debt originally owed or standard interest rates. Even worse, sustained failure to honor credit terms means that with every skipped or missed payment, consumers run the risk of a ruining their own credit history. And in today's market, bad credit scores can be the difference between securing financing for a home, a car or even a hiring decision for a job.
Repeated evidence by state regulators and attorneys general across the country, and even data from the industry itself, shows most consumers do not have their debt problems resolved:
A Federal Trade Commission (FTC) investigation concluded that the damage done to consumers by debt settlement outweighs any potential benefit.
Since 2004, 21 states have brought 128 enforcement actions against 84 debt relief companies.
To date, 41 of this nation's 50 state attorneys general support the Federal Trade Commission's proposed ban on advance fees.
An investigation by the New York Attorney General against the largest debt settlement company in the country, Credit Solutions of America, found that less than 1 percent of customers in that state received promised services. According to the Colorado Attorney General, the average Rocky Mountain resident paid $1,666 in debt settlement fees from 2006-2007 and only 7.8 percent of enrollees completed the program.
A better approach for consumers heavily laden with debt would be to contact creditors as soon as it becomes clear that there are difficulties in making timely payments. The creditors, after all, are the providers of goods and services already accessed. If there are problems in meeting credit terms, seek a direct solution to the debts owed. Involving a third party to possibly intercede has the effect of losing both time and money – two valuable resources.
So the next time you hear a radio commercial about easy solutions to difficult problems remember the truism of an old adage, "If it sounds too good to be true, it probably is."

Charlene Crowell is the Center for Responsible Lending's Communications Manager for State Policy and Outreach. She can be reached at [email protected]

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