Systemic issues continuing to plague the for-profit debt settlement industry are brought to light in the latest CFPB settlement.
People who are desperate for debt relief are often vulnerable to those seeking to lure customers by making exaggerated claims about their ability to erase debts. We have all heard stories of debt relief schemes inappropriately charging consumers advance fees or failing to inform them of their rights. If it all sounds too familiar to you, the latest news about one of the largest debt settlement firms will come as no surprise.
Today’s announcement that the Consumer Financial Protection Bureau (CFPB) has ordered Freedom Debt Relief to pay $25 million in fines, including $20 million in restitution to consumers, should serve as a stark reminder of all that is wrong with an industry that has a checkered past. Some of the allegations that led to today’s settlement announcement, including customers being charged fees without benefiting from the services that were promised, are very similar to what was common in the industry before the Telemarketing Sales Rule was updated to address the more egregious practices of the for-profit debt settlement industry in 2010.
It is widely known that there are significant risks to those who enlist the services of debt settlement firms, even when the companies do not violate the rules governing their industry. Here are just a few of the risks of using debt settlement:
- Debt settlement first requires you to avoid paying debts. This makes your debts “delinquent.” Delinquencies are listed on your credit report and damage your credit score. The Center for Responsible Lending predicts a decrease in credit score of around 60-100 points while other credit score simulators suggest a 150-200 credit score decrease.
- Debt settlement impacts your credit similarly to bankruptcy, with just as much multi-year damage.
- While your account falls farther behind during the “negotiation” phase, your creditors may continue efforts to collect the debt by legal means, which may lead to court action and wage garnishment in some situations.
- Success rates for debt settlement companies are quite low, leaving many people with an even bigger financial problem after being promised much-needed debt help. A report from the Colorado State Attorney General cited in a GAO study disclosed that only 10% of residents enrolled in for-profit debt settlement programs achieved success.
Alternatively, nonprofit credit counseling as offered by NFCC member agencies provides financial education to millions of consumers in person, over the phone, or online. Counseling agencies take a holistic approach and complete a full financial review and personal financial action plan for each client aligned with their goals. NFCC Certified Counselors address the full range, from credit card debt and bankruptcy counseling to first-time home buyers, from student debt to comprehensive financial education.
- Results of an independent study conducted by researchers from The Ohio State University confirmed the sustainable, long-term positive impact of nonprofit financial counseling provided by NFCC Member agencies.
- Credit counseling and debt management programs are easy to access, and the initial counseling session is often free.
- While debt is repaid through a debt management program offered by an NFCC Member agency, financial counseling is ongoing throughout the process to help support successful completion and achievement of important financial goals.
To find out more about the advantages of nonprofit credit counseling and what to expect, visit NFCC.org.