- The Washington Times - Sunday, September 27, 2009

The ads are everywhere — on the Internet, in your e-mail and on the radio.

“Secret program the credit-card companies don’t want you to know about.”

“Eliminate 75 percent of your debt without a bankruptcy.”

“Cut payments, get out of debt and save.”

A free lunch always sounds good, but never better than now with Americans staggering under near-record debt loads and losing their jobs by the hundreds of thousands every month.

It is true that credit-card issuers are increasingly willing to negotiate repayment terms with their customers. And there is a booming cottage industry of providers offering to negotiate on your behalf — usually for a big upfront fee.

After all, you may owe money to half a dozen card issuers, and trying to reach a settlement on your own can be difficult. Don’t expect your creditors to play nice.

But the real sharks in the water are not the companies demanding repayment but the scam artists who fleece people drowning in debt by promising to throw them a life preserver — for just a few thousand dollars more.

“The concern is that many consumers aren’t getting any services at all in the vast majority of cases or not nearly the amount promised,” said Alison Brown, a staff attorney for the Federal Trade Commission.

Such abuses have brought increased scrutiny from regulators and law enforcement.

The industry took off four years ago after federal bankruptcy reform made it more difficult for debtors to shed their obligations, according to Michael P. Kerr, legislative director for the National Conference of Commissioners on Uniform State Laws. The group is appointed by the nation’s governors.

“Debt settlement really popped up into existence in 2004-05, and states are just now adjusting to the mass of market participants,” Mr. Kerr said. “There are some completely illegitimate players out there.”

Keith Nelms and his debt-settlement firm, Allegro Law, were sued by the state of Alabama last month for fraudulent practices. The firm was accused of operating one of the biggest debt-settlement schemes in the country, operating in all 50 states and collecting millions of dollars from 15,000 customers. Prosecutors charge the company pocketed hefty fees yet did nothing to help its clients.

Mr. Nelms had his law license suspended for three years in July.

In May, West Virginia sued James R. Armstrong Jr. of Coral Springs, Fla., charging he “masterminded a web of for-profit companies to enrich himself under the guise of providing debt-management services with Family Credit Counseling Corporation,” which he controlled.

Scam artists thrive on the patchwork of state laws that allow them to operate virtually unregulated in some states. Mr. Kerr’s group has worked to sew up that patchwork. Its proposed legislation has been adopted in a handful of states and calls for debt-relief fees to be spread out over 18 months.

The FTC is taking public comments through Oct. 9 on even stricter proposed regulations that would bar fee collection until after the debts are settled. A public forum — less formal than a hearing — will be held on the proposal in November.

The Association of Settlement Companies, one of the main trade groups for the debt-settlement industry, sees that as a mortal threat to the business. The group prefers the legislation advanced by the commission on uniform state laws, and is working closely with the states on it, said Wesley Young, legislative director for the group.

“We do substantial amounts of work before we settle the debt. When you have a consumer who has finished the program before he is finished paying the fee, we have trouble collecting the rest of the fee,” Mr. Young said.

“I don’t think all the problems come from bad players, although there certainly are bad players. But some are just new to the industry and inexperienced,” he said.

Critics say such debt-settlement trade groups — also including the United States Organization for Bankruptcy Alternatives — have not weeded out those bad actors.

“These attempts at self-regulation have failed miserably. I look at them as price collusion,” said Michael Bovee, founder of the Consumer Recovery Network, a debt-settlement and consumer-education company based in Sandpoint, Idaho.

“If you charge the kind of fees that 90 percent of the companies in my industry charge, in my opinion you’re driving them toward bankruptcy,” said Mr. Bovee, who favors federal regulations.

Mr. Young countered that “negative perceptions” about debt settlement are being spread by rivals such as debt-management organizations that are just fighting for market share.

Knowing the players

The debt-relief industry, as the FTC defines it, includes both debt-management and debt-settlement services.

Debt-management providers negotiate lower interest rates and fees from banks after enrolling debtors in a plan to eventually repay their creditors in full. This option is offered by a variety of for-profit and nonprofit organizations, often as an offshoot of the consumer-credit counseling services they provide.

On the other side of the spectrum are debt-settlement firms that say — sometimes accurately — that they can negotiate away up to 75 percent of your debt.

In debt settlement, clients cease payments to their creditors — severely damaging their credit rating — while the settlement firm tries to negotiate lower balances.

The debtors are then expected to take the amount they would have paid their creditors and save that money every month for a period of years until they have enough to pay off their negotiated settlement.

Most debt-settlement firms charge an upfront fee of 15 percent of your outstanding debt, a $50 monthly fee and a contingency fee of 20 percent or more of the money they save you.

To settle a $40,000 debt this way, it could cost $6,000 just to begin a program with an uncertain outcome. Many debtors are unable to complete the program, said Ms. Brown, of the FTC.

Mr. Bovee’s company instead charges a $495 membership fee that covers the cost of educational materials and negotiations with creditors. After settlement, the company collects 15 percent of whatever it saved its clients.

The company also encourages consumers to do as much of the work on their own as they can, and provides support for them to do so.

“If you have thick skin and can handle the [creditors’] phone calls, doing it yourself might be a better option for you,” said Gerri Detweiler, a personal finance adviser for Credit.com.

It makes even more sense given banks’ newfound eagerness to deal, Mr. Bovee said.

“There are banks that have been around with the same practices since the 1970s, now all of the sudden every 90 days they’re shouting out new policies that are more and more beneficial to the consumer,” he said. “I’ve never seen anything quite like it.”

Whether you negotiate with your creditors directly or with help from a debt-settlement organization — even an honest one — prepare for the consequences.

“By nature, it’s usually an adversarial process where you are trying to pay as much as you can afford but less than you owed,” Ms. Detweiler said. “There are implications for your credit rating and your taxes, and the possibility of being sued by a creditor,” she said.

Debt forgiven by creditors is considered taxable income. If it exceeds $600, a creditor is required to submit a Form 1099 reporting the “income” the debtor has received, Ms. Detweiler said.

Gail Hillebrand, a senior attorney at Consumers Union, said many debtors would be better off in bankruptcy.

“For someone who’s already behind on their bills, the idea that you’re going to save up enough to pay both high upfront fees to a settlement company and have enough to settle your debts is not realistic,” she said.

“You don’t have a lot of good choices but debt settlement is probably the worst one. Some consumers need to file for bankruptcy.\

Yet bankruptcy will stain your credit record for 10 years, while debt settlement will linger for only seven years, Ms. Detweiler said. In addition, your bankruptcy becomes a public record, while debt settlement does not.

Debt management also affects your credit score because lenders insist you close all your accounts during the process to ensure you are not gaming the system, she said.

A good settlement

Melissa Shover, 35, of Staunton, Va., is happy with the debt-settlement plan she has with Consumer Recovery Network.

“They helped negotiate settlements with the credit-card companies and the biggest thing they did that really helped me was they have a great education program to help you understand how all this works,” she said. “They made it easy for me.

“They’re very upfront. If bankruptcy is your better option, then they tell you,” Mrs. Shover said.

“They only charge you a percentage of what they save you. I looked into 20 different companies and they were all charging a percentage of what you owed.”

She started with $70,000 in debt and has settled one account for 50 percent of her balance and another for 32 percent after 18 months in the program. She still has two more accounts to settle.

She had already refinanced her mortgage and depleted her retirement savings to pay off some of her debt.

“I wish I would have been with the company before I depleted all my funds,” she said.

Mrs. Shover had no success trying to deal with creditors directly.

“I’d call these companies and say, ‘Is there anything we can do,’ and I was told by every one of them, ‘I’m sorry, there’s nothing we can do.’”

The mother of three, who works for a telephone company, never thought she would be in this position. Her husband, Josh, is not in a debt-settlement program.

“It is a stressful situation for somebody who went from always paying my bills on time to not being able to,” she said.

Part of the problem was a house that needed endless repairs.

“We’d get these cards at a 0 percent teaser rate and say, ‘Oh, we can pay it at tax time,’ but tax time comes along and the hot-water heater leaks or the bathtub cracks,” she said.

“We know we owe the money, it was our fault we got this way. People make bad decisions all the time, but if you don’t do something about it you’ll be paying for it the rest of your life,” Mrs. Shover said.

Getting counseling

In debt management, the better providers offer credit counseling and monthly fees as low as $20. Clients pay a lump sum every month, which the organization disburses to the creditors.

Debt managers, often nonprofits, are partially funded by creditors who recognize their success in recovering debt. Some also receive grants from the federal Department of Housing and Urban Development.

There have been problems in this industry, too, and some operators have lost their nonprofit status because they were making too much money or profiting on the side through self-dealing, said Mr. Kerr, of the commission on uniform state laws.

In general, though, the debt-management business is better regulated than the debt-settlement business, Mr. Kerr said.

“Even the debt-management companies can be unscrupulous,” said Edward Johnson, chief executive officer of the Better Business Bureau of Greater Washington and Eastern Pennsylvania.

Consumers should stick with organizations accredited by the National Foundation for Credit Counseling or the Association of Independent Credit Counseling Agencies, he and others advise.

Michael Smith, chief executive officer of SafeGuard Credit Counseling Services, based in Hauppauge, N.Y., agrees.

“We educate clients and put them on a budget so they can pay off those balances in full,” Mr. Smith said.

The company charges customers an average of $20 a month and also receives grants from creditors and HUD.

“When a consumer is calling in and needs help, we take the consumer and we put him through counseling sessions and try to offer all the options that might be available to them,” he said. “We look at income and expenses and their whole budget.

“If they are totally upside down, we tell them they may have to speak to an attorney. The other option is debt settlement. That’s what Consumer Recovery Network does, self-help debt settlement. It has a negative impact on your credit, but it might be the only option a consumer can afford.”

‘I want to pay’

Geri Peak, a self-employed program evaluator in Baltimore, became a SafeGuard client after it acquired the accounts of the firm she was with before, which went out of business amid an investigation, she said.

Though she and her husband got in too deep with more than $40,000 in debt, they felt an obligation to pay the debt in full.

“My husband and I were laid off once in the deep dark past but we haven’t lost our jobs in this downturn so there’s no reason to want to pay less because we bought what we bought.

“If I have the resources to pay for what I purchased, I want to pay. I don’t want to be forgiven,” Mrs. Peak said.

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