Debt-settlement fraud rising with lack of regulation
Sunday, March 28, 2010
Baltimore resident Gloria Snowden thought she had found a way out from under her $10,000 credit card bill when she signed up with a company that promised to negotiate with creditors to settle the debt for less than she owed.
It was 2003 and the nascent debt-settlement industry was just taking off. Traditional credit counseling and consolidation organizations devise payment plans and arrange lower interest rates and fees, but debt-settlement companies bargain with banks and collection agencies to forgive part of the amount due. They typically require customers to pay a hefty fee up front and make monthly deposits into an independent account.
Negotiations begin only after the balance reaches a level that they believe creditors will accept -- a red flag for consumer advocates who say the firms are predatory, and in some cases, fraudulent.
Snowden gave the firm she signed up with access to her savings account and deposited at least $400 each month toward her settlement.
But when the collection calls kept coming, Snowden, 65, said she realized that the firm hadn't contacted her creditors. For five years, she battled with the company to negotiate with those she owed, all the while putting money in her savings account. Snowden said she didn't realize she had been swindled out of her deposits until the Maryland attorney general's office called to tell her it had nailed the firm's leaders, who received six months in jail and had to pay $2.5 million in restitution. Snowden said she has not gotten her money back and had to file for bankruptcy.
"I got a job. I work," she said. "I just got caught up in this."
Many debt-settlement firms offer legitimate financial services, but a lack of regulation has made it difficult for people such as Snowden to sort the good from the bad. The fast rise of firms has prompted lawsuits and pressed states to draft laws to protect their most financially vulnerable residents.
The Maryland General Assembly is considering a bill that would cap the firms' fees, which are often paid before they make a single call to a creditor. In one year, complaints about such companies to the state attorney general's office have quadrupled to 121. Investigations have been launched in Illinois, Vermont, Maine, New York and Florida.
"It's a sign of the times. . . . People found themselves in deeper and deeper debt," said Marceline White, executive director of the Maryland Consumer Rights Coalition. "As they were trying to dig out, these firms rose up."
Carried away by easy credit
Debt-settlement companies cater to those who got caught up in the era of easy credit only to find themselves overwhelmed. When changes in federal laws a few years ago made it more difficult to declare bankruptcy, a new class of consumers emerged with massive debt and no way out.
When the Association of Settlement Companies, a trade group, was established in 2005, there were about 300 firms in the sector, according to executive director David Leuthold. Now, he said, about 1,000 firms handle $18 billion in debt across the country. The average customer has $30,000 in credit card debt.
"We're the only alternative out there for them," Leuthold said. "They know that they could get sued. They know that creditor calls could continue to come. They still want to get on the program and repay what they can."