A Vaccine Against Debt Settlement Sickness

If you were sick and your doctor took obvious measures to make you even sicker, at a minimum you would quickly find a new doctor. Of course, such a doctor -- or most any other professional engaging in clear-cut abuse -- would also face serious sanctions.

Yet, in recent years debt settlement operators have profited handsomely while blatantly making their "patients" financially sicker, and until now no one has blocked their terrible prescriptions.

This has to end. They need to be held accountable.

The signing into law of my office's initiative -- the Illinois Debt Settlement Consumer Protection Act -- will provide Illinois consumers with the strongest protection in the nation against the abuses and unfair treatment from these companies.

Consumers are generally at their most vulnerable when they seek out the help of these firms. They come with crushing credit card, medical or other debts seeking guidance and a path out of their financial morass.

Far too often, however, they get ripped off by lousy advice that guides them not out of the debt quagmire but rather over the cliff into insolvency. In fact, 30 to 40 percent of people who end up filing bankruptcy have done so after giving money to a debt settlement operator.

The need for this new law grew out of the drastic increase my office has seen recently in complaints against dishonest debt settlement operators. Since 2009, my office has filed seven lawsuits against firms using abusive and deceptive means to take money from Illinois consumers whom they promised to help through their financial woes.

Not surprisingly, these companies blossomed as our economy suffered a drought. The financial challenges faced by millions during this deep recession have proven to be fertile ground for duplicitous debt settlement firms.

Typically, a consumer will be lured in by promises that their credit card debt can be paid off for a fraction of the amount owed. The consumer is always required to pay the company non-refundable fees up front -- often thousands of dollars -- but that is only the beginning of the nightmare.

The consumer is also told to stop paying his or her credit card companies and instead to pay into an account administered by the debt settlement firm. Theoretically, after many months this fund will have grown to the point where it can be used to negotiate a settlement with the credit card company.

Tragically, very seldom is any settlement actually achieved. About two-thirds of consumers drop out of these programs before their debts are settled. They not only lose the thousands of dollars in non-refundable fees, they are often deeper in debt than when they started thanks to penalties and late fees imposed by the credit card companies due to the lack of payments.

Many consumers also end up being sued by their credit card companies despite spending thousands on the promises of a debt settlement operator.

The Illinois Debt Settlement Consumer Protection Act will prohibit this egregious behavior. Under the law, companies cannot charge any upfront enrollment or maintenance fees beyond a maximum $50 enrollment fee.

The law also requires debt settlement firms to actually settle debts before they can get paid. Fees are capped at a maximum of 15 percent of the savings achieved from the debt settlement.

The law also bans deceptive advertising and promises by these companies. And importantly it not only prohibits them from advising consumers to stop payments to creditors, but also requires them to provide specific warnings before a contract is signed such as:
• Creditors may still try to collect by contacting you, suing you and garnishing your wages or bank account.
• Not all creditors will agree to accept a balance reduction.
• Your credit rating and credit score likely will be harmed.

Legitimate not-for-profit credit counseling services do exist and help many consumers. The National Foundation for Credit Counseling can help you identify these firms at www.nfcc.org.

I often say that paying off your debt is like dieting. There are no miracles cures; it takes discipline and hard work.

Millions of people are struggling financially as one of the most severe recessions in our country's history lingers. While most of us are trying to be more frugal, the loss of a job, a divorce or a medical emergency can quickly sink us deeply into debt.

Hard work, careful planning and realistic financial advice will be required by many to regain solvency. The Illinois Debt Settlement Consumer Protection Act at least will insure that those struggling are not thrown an anchor when what they need is a life preserver.

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