Debt Settlement Consumer Protection Act

Senators Charles Schumer (D-NY) and Claire McCaskill (D-MO) have introduced legislation to reign in a rogue industry of charlatans that has fleeced desperate debtors out of hundreds of millions of dollars; dollars that were intended to be paid to their creditors. The Debt Settlement Consumer Protection Act proposes upfront disclosures, fee limits and enhanced enforcement against false advertising.

Here are the main protections proposed by the Schumer-McCaskill Debt Settlement Consumer Protection Act:

Mandatory Written Disclosures

Debt settlement companies would have to provide an itemized list of the actual services provided before the client could enroll in a debt settlement plan. Additionally, all fees and compensation must be clearly and conspicuously listed in the contract.

Right to Cancel

Debt settlement companies would have to provide for the right to cancel at any time. Debtors would also have the right to a prompt refund of all unearned fees upon cancellation.

Prohibits Fees Before Service

Debt settlement fees would be prohibited until a debt was actually settled. This means that the first payments made by a client would go towards their first settlement. Current industry practices allow for the first 6-8 months of payments to be claimed as fees by the settlement companies. New limits would require that fees were “reasonable and commensurate” to the services provided by the debt settlement company.

False Advertising Prohibited

Debt settlement companies would no longer be able to imply that they have relationships with creditors that do not exist. They would not be able to suggest percentages of debt settled that do not match their actual track record. The Federal Trade Commission and states’ Attorneys General would have more clearly defined enforcement roles against the worst offenders.

Death Knell for Debt Settlement Companies

Debt settlement companies rely on massive amounts of media exposure to draw in unsuspecting debtors who are desperate to avoid judgments and credit damage. By shutting off the upfront dollars that these rogue operators require, they will no longer be able to finance their million dollar marketing campaigns with pre-service dollars. Since debt settlement companies have the most generously defined success rates of a maximum of 7-11% (per Review of Briesch Debt Settlement Study), most marketing money will evaporate.

Alternatives to Debt Settlement

It should be noted that negotiating a settlement directly with a debt collector is sometimes a reasonable option. However, hiring a debt settlement company is always a bad idea, since their extraordinary fees combined with their paltry success rates make their plans one of the surest guarantees of financial failure, legal action and bankruptcy. Fortunately, Congress finally appears to be making a change to protect debtors from the excesses of debt settlement companies. Final approval of the Debt Settlement Consumer Protection Act depends on likely Congressional approval. Such approval will mean the end of late night commercials and other too-good-to-be-true pitches by debt settlement companies.

Instead of falling victim to debt settlement operators, regulators and consumer protection advocates recommend that debtors first try contacting their lenders to work out an alternative arrangement. If multiple debts become overwhelming, then a reputable consumer credit counseling agency may be the best option. Surprisingly, hiring a debt settlement company is nearly always worse than filing for bankruptcy protection. Choose your path carefully!

Kenneth Long
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Kenneth Long

President at Debtors Unite
Kenneth Long is President of Debtors Unite, Inc. as well as President and Vice Chairman for Vision Credit Education, Inc. He served as a regional coordinator for the North Carolina Saves campaign. Long co-founded the Wake EITC Coalition along with Family Resource Center of Raleigh.

Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.

Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.

In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.

Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!

Favorite quote:

"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."

Thomas Jefferson
Kenneth Long
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