The Ohio Department of Job and Family Services still reports that over 10% of Ohio and 12% of Lucas County workers are unemployed. With high unemployment rates, people are drowning in debt and looking for a lifesaver. Unfortunately, there is no shortage of debt-settlement/relief companies willing to cast them an anchor disguised as a lifeline.
A client recently sought my assistance in reading and understanding the contract she wanted to sign with such a debt-settlement company. The client has over $41,000.00 in credit card debt with 6 different companies, owing between $1,200.00 and $12,000.00 to each of the creditors. Notably, she has never been late or missed a credit card payment. Although she is able to make the minimum payment for each of the credit cards, she has very little excess income at the end of the month. The client was solicited by a California company offering their professional services to help her settle her credit cards for an estimated 50% of the amount owed, a savings they boasted of approximately $20,000.00. Sounds pretty good, right?
Wrong! As reported in a recent article by MSN Money, there are several negative effects of using a debt-settlement company, including outrageous fees, negative tax and credit consequences, and lawsuits by the creditors. Fortunately, the Federal Trade Commission (“FTC”) has issued new rules regulating debt-settlement companies. In the case referenced above, the debt-settlement company offered to negotiate settlements at a goal of 50% of the overall debt, after their outrageous fees for services were paid, which fees included: a $299.00 counseling fee; a 13% percentage of debt fee (in this case over $5,300.00), payable over the first nine months of the contract; plus a $75.00 per month service fee. The new FTC rule, which goes into effect October 27, 2010, will prohibit debt relief companies from charging fees until the following occurs: the service successfully renegotiates, settles, reduces, or otherwise changes the terms of at least one of the consumer’s debts; there is a written settlement agreement, debt management plan, or other agreement between the consumer and the creditor, and the consumer has agreed to it; and the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.
Even though the new rules provide protection for consumers in regard to how the debt relief service may collect fees, the amount the debt relief company may charge for its services is still not regulated. As in the case above, attorney fees and costs for filing either a chapter 7 or 13 bankruptcy are often a fraction of the cost to the consumer, yet provide greater protections. If you are struggling with your credit card debt, it is advisable to consult with an attorney to determine what lifesaving options are right for you. As with all matters in which we practice, initial consultations with the GTB&S bankruptcy attorneys are free.