Federal Regulators on Debt-Relief Companies

Over the past several years, federal regulators have been cracking down on debt-relief companies, which are companies that claim they can renegotiate, settle, or provide debt relief to consumers. According to one federal regulator, “dealing with debt settlement companies can be risky” and they can “leave you deeper in debt than you were when you started.”

The Federal Trade Commission (FTC) recently settled several enforcement actions with firms that were allegedly facilitating illegal robocalls to pitch fake debt-relief services in violation of the FTC Act and the FTC’s Telemarketing Sales Rule. One of the companies, NetDotSolutions, had initiated billions of robocalls to pitch auto warranties and debt-relief services. Another company, Higher Goals Marketing, also pitched fake debt-relief services.

In addition to significant financial judgments, the FTC also banned several of the defendants from working in the debt relief industry. They will soon join the FTC’s publicly available list of companies and people banned from the industry. So far, the list has 450 companies or people.  

Debt-relief companies have been frequently criticized by federal regulators and government watchdogs for harming consumers. For example, many companies charge customers upfront fees regardless of whether the company is able to successfully reduce the customer’s debt.

The Government Accountability Office (GAO), a government watchdog, conducted an investigation of debt-relief companies in 2010. “Seventeen of the 20 companies GAO called while posing as fictitious consumers say they collect fees before settling consumer debts – a practice FTC has labeled as harmful and proposed banning – while only 1 company said it collects most fees after it successfully settles consumer debt.”

The upfront fees can be detrimental to borrowers because lenders are not obligated to work with debt-relief companies. Thus, these companies may collect fees upfront, yet are unable to successfully negotiate a settlement or a reduction in debt for the borrower. According to an academic study on this topic, “enrolling in a debt settlement program always carries substantial risk” and “a relationship with a debt settlement company has very little upside for the consumer.”

In addition to upfront fees, most debt relief companies ask customers to stop making payments on their debts with the hope that it will provide the debt-relief company more leeway in negotiations with the creditor. Although this could potentially work, it may also lead to a lower credit score for the borrower and a higher overall debt as interest and other fees pile on to the principle.

The Consumer Financial Protection Bureau (CFPB) encourages borrowers to avoid doing business with debt-relief companies if they do any of the following:

• Charges any fees before it settles your debts
• Represents that it can settle all of your debt for a promised percentage reduction
• Touts a “new government program” to bail out personal credit card debt
• Guarantees it can make your debt go away
• Tells you to stop communicating with your creditors
• Tells you it can stop all debt collection calls and lawsuits
• Guarantees that your unsecured debts can be paid off for pennies on the dollar

Rather than utilizing the services of debt relief companies, a potentially better option is credit counselors. These are typically non-profit organizations that aim to help indebted people manage their money.

The CFPB and the FTC both have webpages and materials for those wanting to learn more about credit counselors. Also, the Department of Justice provides a database that includes a list of approved credit counseling agencies by state and judicial district, which was last updated on March 29.