The Government Accountability Office recently called up 20 debt settlement companies, pretending to be consumers in need of help. What they found was an industry rampant with fraud.
If you’ve been visiting this site for long, you probably know I’m no fan of debt settlement. In recent news stories and posts I’ve explained why:
- Here’s a story I did explaining what debt settlement is.
- Here’s a heated exchange between me and a man who claims to have invented the debt settlement industry.
And now it appears that some senators, state attorneys general and the Government Accountability Office agree with me. If you’re considering debt settlement to solve a debt problem, or know someone who is, here’s some required reading and/or watching:
- First, watch this video of a U.S. Senate Commerce Committee hearing about the debt settlement industry. It took place last Thursday, April 22.
- Then read this summary of the conclusions reached after an investigation of the debt settlement industry by the Government Accountability Office.
- If you want more detail, here’s the complete GAO report. It’s called Debt Settlement: Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers.
Watch the video and/or read the GAO report and you’ll learn that undercover GAO investigators contacted 20 debt settlement companies pretending to be consumers with debt problems. Here’s a few of the things they documented:
- Seventeen of the 20 companies GAO called while posing as fictitious consumers said they collect up-front fees before settling debts — a practice FTC has labeled as harmful.
- Nearly all of the companies advised GAO’s fictitious consumers to stop paying their creditors, including accounts that were still current: something that would obviously prove highly detrimental to credit scores.
- GAO found that some debt settlement companies claimed unusually high success rates — as high as 100 percent. FTC and state investigations have typically found that less than 10 percent of consumers successfully complete these programs.
How to recognize a debt settlement come-on.
Since debt settlement companies rarely label themselves as debt settlement companies, it’s important to be able to differentiate these companies from other types of more reliable and less controversial debt relief agencies.
As I’ve explained in various news stories, debt settlement is simply offering to pay less than what you owe to fully satisfy a debt. So one way you’ll recognize a debt settlement ad is that it will say something like “reduce your debt 40-60%!” Debt settlement is the only technique (other than bankruptcy) that promises to reduce the amount you actually owe.
Credit counseling, on the other hand, normally offers to help you set up a payment plan to repay your debts in full, albeit with potentially lower rates and reduced fees.
Bottom line? I can’t say that all debt settlement companies are bad, some may genuinely care about you and act in your best interests, but I can now say with greater confidence that many are worth avoiding.
To learn more about the different ways of dealing with overwhelming debt, check out my stories on credit counseling, bankruptcy and debt settlement. And don’t forget to check out my latest book, Life or Debt 2010.