Want a Get-Out-of-Debt-Free Card?

08/02/2010 1:31 pm EST


Terry Savage

Author, The Savage Truth on Money

Wouldn’t you love to dump your credit card debt? It seems that lots of people want to play “Let’s Make a Deal.” And there are plenty of debt-negotiation companies advertising they’ll help you do it.

Now, under new Federal Trade Commission regulations, these debt-settlement companies are going to be on a much tighter leash. Customers will have to get results, before the companies can collect their fees.

The real problem with these debt-negotiation companies is that they charge huge up-front fees before they do any work for the consumer. And since the debtor needs some cash to make an offer to the creditor, these debt “advisors” suggest you stop paying your monthly minimums and instead divert the payment to an “escrow” account, building up enough cash to pay the fees and make an offer.

Consumers who follow this advice find that their credit report is even more devastated and that they’ve incurred more interest and penalties. They may even have their wages garnished. But since the negotiation companies often suggest that consumers have the bills forwarded directly to them, consumers may never know about these dire consequences until it is too late.

Ultimately many consumers drop out of these programs without getting any help, and with their credit ruined. But the settlement companies still collect substantial up-front fees.

That’s all going to change.

Under new rules set to go into effect on September 27th, companies must show results first. A debt settlement company can earn fees only when it reaches a settlement on at least one of the consumer’s debts—and the consumer agrees to it in writing. Fees cannot be collected until the consumer has made at least one payment to the creditor as a result of the negotiated agreement. 

And these debt-settlement companies will be required to make certain pre-contract disclosures, including how long it will take to get results and how much it will cost.

But the new FTC rules do not limit the amount of fees that can be charged, so those who enter these agreements must still decide if it is worth the ultimate cost—not only in dollars, but in the hit to their credit report when an account is reported “settled” and not paid in full.

It’s nice to see the FTC take action, if a bit belatedly, even before the new Consumer Protection Agency comes into being. But we wouldn’t need that new agency if the FTC had been doing its job—not only in the case of debt-settlement agencies, but also when those crazy mortgages were being promoted.

But do you think people (or these companies that help them) should be trying to dump their debt by making a settlement offer of perhaps 40 or 50 cents on the dollar?

Is seeking a settlement just smart money management? Or is it a moral failing? Does it make any difference depending on why the debt was incurred in the first place?

Is dumping personal debt any different from a company reneging on promises of future health care benefits or backing off a promise to make matching contributions to a retirement plan?  

Is negotiating down personal debt any different from a government welching on its repayment obligations by simply printing more money, thereby destroying the value of its currency?

Aren’t way too many people looking for a deal? And who pays in the end?

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