Pitches from the debt settlement industry sound good: Who wouldn’t want to get out from under a mountain of credit-card debt for pennies on the dollar? But too often, these for-profit companies leave consumers even deeper in debt.
Not all debt settlement companies, which have mushroomed nationwide since the Great Recession and the housing market crash, are unscrupulous. Like payday lenders, they probably have a place in Ohio’s smorgasbord of financial services. But they need adequate regulation to protect vulnerable consumers.
Ohio has such regulation. Its 2004 debt-adjuster law limits the fees debt collection companies can collect, including 8.5 percent — or $30, whichever is greater — of monthly debt payments. Those charges come in addition to service or consulting fees.
Proposed state legislation backed by the industry would remove debt settlement services from the Debt Adjusters Act and remove the caps, giving the industry a free hand with desperate consumers. Lawmakers should kill the bill, or at least amend it to include fee caps.
The average debt settlement client carries between $25,000 and $30,000 of credit-card debt, without enough income to pay it off. Consumers with debt settlement plans typically stop paying off debts while the settlement company negotiates with creditors to accept less than the debtor owes. Consumers deposit money in a special savings account that debt settlement companies use to leverage settlements.
But creditors are under no obligation to negotiate. Failure to pay can lead to more debt, additional late fees, harassing phone calls, shredded credit scores, and even lawsuits.
In 2010, the Federal Trade Commission banned debt-relief companies from charging consumers fees before they settled at least one of their debts. That helped, but companies often settle one of the smaller debts first. So interest and fees on larger debts can continue to grow and remain unsettled.
The bill before the state House is bad for consumers. The debt settlement industry does not need the changes the measure includes to operate in Ohio. They’ve been here for nearly a decade, under laws that offer at least minimal protections for consumers.
The Ohio Poverty Law Center and the Coalition on Homelessness and Housing in Ohio oppose the bill. Linda Cook, senior staff attorney for the law center, a statewide advocacy group, said most complaints about debt settlement companies come from senior citizens, who are especially conscientious about paying off debts and avoiding bankruptcy. More of them, she said, are entering retirement saddled with debt and mortgages that exceed the value of their homes.
Backers of the House bill say it would afford consumers more protections, including requirements to disclose costs to the debtor. But the FTC already mandates these consumer protections.
The industry has been plagued with problems around the country, even after new FTC rules took effect in 2010. These include charges of ignoring state consumer laws and misleading customers. Ohio Attorney General Mike DeWine warned last year that some companies leave consumers worse off.
Consumers have other options, including nonprofit groups that offer debt management services. If debt settlement companies in Ohio can’t operate with reasonable and nonpredatory fees, let them go elsewhere.