Better Business Bureau of Southern Arizona is warning financially troubled families to beware of misleading debt settlement companies that claim they can easily reduce or eliminate credit card debt.  Since the start of the recession, BBB’s nation-side have received more than 3,500 complaints from individuals, including many who paid hundreds of dollars in upfront fees to debt settlement companies but only fell deeper into debt.

Locally, BBB has received seven complaints from Southern Arizona consumers against debt settlement companies, and average monthly inquires into the companies have increased 200 percent since the start of the recession.

“The debt settlement industry is flourishing and many families are being lured into believing that debt settlement is an easy fix,” said Kim States, BBB President. “The truth is that the process doesn’t work for many consumers, it has potentially serious negative consequences, and should primarily be used as a last ditch effort to stave off bankruptcy.”

Consumers from all 50 states have filed complaints with BBB about debt settlement companies since the recession began in late 2007. In addition to BBB, angry customers are also taking their complaints to their state Attorney General. Attorneys General from Florida, Maine, Texas, Idaho, Missouri, New York, Illinois, West Virginia, Vermont and Minnesota have taken action against companies such as Dallas-based Debt Settlement America, Debt Rx USA, Financial Freedom of America and Credit Solutions—which has received more than 1,600 complaints alone in the last 36 months—and Austin-based Clear Your Debt and Swift Rock Financial Solutions.

Some practices by debt settlement companies are also coming under fire on Capitol Hill. On April 28, Senator Charles Schumer (D-NY) introduced The Debt Settlement Consumer Protection Act, which seeks to “protect consumers from deceptive, abusive and financially injurious practices rampant in the debt settlement industry.”

Typically with debt settlement (also referred to as debt negotiation), the consumer pays an upfront fee to the debt settlement firm with the understanding that the company will try to negotiate a settlement with creditors for less than what is owed. The debt settlement business works with the consumer to establish a plan for the consumer to put money into an account administered by the debt settlement company or a third party, and that money is used to pay any negotiated settlements. It will usually take at least six months to a year before there is enough money to start settling accounts, and during that time the consumer will typically not be making payments to creditors. Not only does this put the consumer at risk of having creditors file garnishments or other legal actions, his or her credit rating will likely suffer as a result of not making required monthly payments.

Complainants to BBB allege that instead of having their debt settled as promised, they were driven deeper into debt and sometimes sued by their creditors—which led to mounting legal fees—and had their wages garnished.  Some complainants decided after making several months worth of payments that they did not want to proceed with the debt settlement process, but the debt settlement company did not give them their money back—in one case as much as $15,000.

BBB warns consumers to look for the following red flags when considering getting help from a debt settlement or negotiation firm:

• High upfront fees – Beware of companies that require large upfront fees before any debts are settled. Often, these upfront fees may be better used to reduce a consumer’s overall debt.
• Promises that are too good to be true– Some companies might promise that they can reduce debt by more than half even before looking into the customer’s financial situation.
• Claims that it’s a fast, easy and painless process. – Reducing debt through debt settlement takes time—often years—and can have a significant negative impact on the customer’s credit score. It can also expose consumers to lawsuits and garnishments.

Before enlisting the help of a debt settlement company, BBB recommends that struggling consumers:

• Contact their lender first. – Try to work out an agreement directly with your lenders before enlisting outside help.
• Seek help from a non-profit credit counseling center – Credit counseling centers can provide guidance for little or even no cost. You can find a credit counseling center near you at the National Foundation for Credit Counseling, www.nfcc.org.
• Consider debt settlement only as a last resort before filing for bankruptcy. The debt settlement process can take years and have a severely negative impact on your credit rating and can limit your access to future credit. In the meantime, your credit card company or other creditors can decide to take you to court and garnish your wages.  It is best to avoid these potential consequences if you have other workable alternatives to dealing with your debt.
• Research the debt settlement firm with BBB first. Find out how many complaints it has received, how the firm responded to complaints and whether or not there are any recent government actions or lawsuits against the company.

More advice on managing credit and paying down high balances is available through BBB’s Managing Credit – Made Simpler at www.bbb.org/credit-management/.

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