Escalating complaints from consumers are leading states to crack down on abusive practices by debt settlement firms. Such companies promise help to desperate people, but too often charge large initial fees only to do little to nothing to actually help.
Leading the charge in the crackdown is Illinois, which recent passed a bill prohibiting debt settlement firms from using unfair and abusive practices. The lawmakers behind the bill state that many of the debt settlement claims play on the fear and desperation of consumers in deep debt, but many are nothing more than scams. The new Illinois law allows collection agencies to collect a fee only when the debt is settled.
In addition to this legislation, the Illinois Attorney General has filed two lawsuits against debt settlement firms, alleging deceptive marketing practices, excessive fees, and little or no effectiveness in improving the financial standing of consumers. The companies in question are SDS West Corporation, Aliso Viejo, Calif. and Debt Relief USA, Inc., Addition, Texas.
The Illinois Attorney General’s office has seen advertisements for debt settlement companies increase sharply. These advertisements promise a significant reduction in consumers credit card debt and alternatives to bankruptcy. In a typical scenario, after consumers enroll in such programs, companies charge large initial fees and instruct consumers to stop paying their credit card bills.
Unfortunately, these companies never negotiate with the credit card companies, and instead additionally charges and fees are incurred by consumers. Debt collection actions may begin and credit card companies may even sue delinquent consumers to recoup the debt, all while the consumer is enrolled with a debt collection agency.
SDS West & Debt Relief USA
The two Illinois suits make similar, but not identical, allegations against SDS West and Debt Relief USA.
SDS West, which has enrolled hundreds of Illinois consumers in its debt settlement program, claims that mediation services will help consumers be free of debt in 12 to 36 months and will reduce consumers’ debt by half. In practice, the suit alleges that SDS West charges enrollees hefty
According to Madigan s complaint, SDS West and its business partner Nationwide Support Services inform consumers that their debt mediation services will help to reduce consumers debt by nearly 50 percent and that consumers will be debt-free in 12 to 36 months. This is accomplished by consumers making payments to SDS, instead of their credit cards, to create a lump sum for debt negotiation purposes. The Illinois suit alleges that SDS does not disclose to consumers that payments collected go toward SDS’s own initial enrollment and monthly maintenance fees before being paid into a lump sum savings.
Debt Relief USA claims that it will reduce debt by 40 to 60 percent and that consumers enrolling in its program may be debt-free in as little as 36 months. Debt Relief USA has also had hundreds of Illinois residents enroll in its program. The Illinois law suit alleges that most dropped out of the program before the company settled any debts but after the company collected non-refundable enrollment fees.
Debt Relief USA is alleged to have failed to do any negotiating with credit card companies on behalf of its consumers during the initial months of enrollment, when consumers stop paying their credit card companies and instead pay Debt Relief USA. This money goes toward initial fees, usually based on a percentage of the consumers total credit card debt. Only after Debt Relief USA has collected its fees do consumer payments begin going toward a lump sum for the purposes of negotiation. The failure of Debt Relief USA to negotiate with credit card companies while consumers are paying initial enrollment fees leads to even higher penalties and debts with those credit card companies. Additionally, Debt Relief USA is alleged to change a large settlement fee in cases in which it does settle a debt for a consumers.
The Illinois suit alleges that both companies have violated Illinois consumer fraud and business law by misrepresentation.
Consumers in debt trouble should seek credit counseling first, instead of debt settlement services. In some cases credit counselors will recommend that consumers also use debt management services. Such services help create a debt payment plan. The consumer makes one monthly payment which the debt management services then distributes appropriately to creditors.