Bill targets debt-relief companies

Amid tough economic times, people who are struggling with debt often turn to credit counseling, debt-consolidation or debt settlement companies for relief.

But what many don't realize is that, depending on the company, doing so can actually make the situation worse.

"We've had so many people laid off in the recent past that they're having to look closer at their finances than in the past," said Trish Powell, president of the Permian Basin Better Business Bureau.

Powell said that some for-profit debt companies that promise to lower the principal balance on credit cards, consolidate payments to one low monthly payment or other easy-money solutions often don't deliver.

"The consumers are the ones that suffer," she said.

Seeking to curb abuse and put some regulation on what advocates say is a largely unregulated industry, the Uniform Law Commission, a nonprofit legal organization, drafted the Uniform Debt-Management Services Act in 2002.

"We're funded by the states; we're not a special interest group; said Michael Kerr, legislative director of the National Conference of Commissioners on Uniform State Laws.

The proposals in the act affect debt settlement, debt consolidation and credit counseling entities by requiring more disclosure, restricting the amount of fees that can be collected and enhancing enforcement.

"Texas is a really important state because that's where most of the (debt settlement) companies are based," Kerr said. "The benefit for Texas consumers is Texas law doesn't regulate these companies at all."

The act requires companies to provide detailed information to consumers, enabling them to make educated decisions before agreeing to and during the settlement process. The act also limits upfront fees and ties overall fees to the benefits actually received by consumers.

Colorado, Delaware, Rhode Island and Utah have all adopted the Uniform Debt-Management Services Act.

The proposals of the act are contained in Senate Bill 2233 of the 81st Texas Legislature filed March 13 by Sen. Kevin Eltife, R-Tyler. A hearing on the bill has not been set, but Kerr said he's hopeful it will be taken up soon.

"I think it's going to move and be a real win for Texas customers," Kerr said.

State Sen. Kel Seliger, R-Amarillo, said while he hasn't read the details of the bill yet, he is in favor of helping consumers.

"On the surface of it, from what little I do know, it seems like a pretty good idea," Seliger said.

While they may sound the same, the services offered by the three targeted industries differ and have changed over time.

Many of the credit counseling companies get their funding from the credit card companies, Kerr said.

"Credit counseling has been around a long time. They'll set up a budget for you and set you up with a payment plan," Kerr said.

Debt consolidators act as intermediaries.

"Debt consolidators used to be nonprofit, but the IRS has gone through with a hatchet and removed their nonprofit status," Kerr said.

While some debt consolidation companies are still nonprofit, debt settlement companies are often all about the money, Kerr said.

Though they often deny it, the general business model of for-profit debt settlement companies is to encourage consumers to not make payments on currently due debts, begin setting aside money for a future settlement offer, and to pay the debt settlement company significant upfront fees, Kerr said.

After the consumer manages to save up a specific target amount, somewhere between 40 and 60 percent of the debt then outstanding, the agency then submits an offer to the creditor to settle the debt for an amount smaller than the total of what is then outstanding, which provides savings to the consumer.

"If these companies are going to operate in a fair way, they are going to have to tell the consumer what they are going to do," Kerr said.

The act also seeks to provide consumers recourse.

"If they don't end up getting a settlement that's beneficial to the consumer, there's not much the consumer can do," Kerr said.

Powell said she thinks the proposals would be a benefit to the public.

"I think that the government in general should attempt to assist consumers by preventing companies from creating supposed opportunities that don't actually help people but hurt them," Powell said. "At the same time, I think that consumers have a lot of responsibilities on their own."

Those responsibilities include living within your means and staying actively involved in one's finances, she said, adding that what many people don't realize is the services debt-consolidation companies provide can be accomplished for free.

"People can do that on their own. People can contact their creditors. It doesn't cost them anything," Powell said.

But people are often afraid or embarrassed about their situation so they seek help elsewhere.

"Most people tend to turn to someone who they think is an expert in that field," she said.

Though the proposals of the Uniform Debt Services Act would curb practices of some debt companies, Kerr said there is a market for debt settlement.

"There's a lot of people that are intimidated by trying to work out a deal with credit card companies," Kerr said.

But many consumers may be looking for help where debt settlement isn't viable.

"There's a lot of folks that are in debt-reduction programs that would probably be better off going into bankruptcy." Kerr said. "That's what it's there for."

The act doesn't cover payday lending companies. Payday lenders are often widely criticized by some politicians for high interest rates charged on their short-term loans and are a real problem, Kerr said.

"We can't cover everything in a single bill," Kerr said.

DEBT RELIEF ADVICE

Before enlisting the help of a business to manage debt, the Better Business Bureau offers the following advice for consumers:

>> Attempt to work out a plan with lenders before enlisting outside help. Stay in contact with lenders and monitor monthly statements even if you obtain assistance. 

>> Start with a credit counseling service. Credit counseling services are often nonprofits that offer financial guidance for a small fee, or even for free.

>> Always check the company out first with BBB. BBB Reliability Reports on debt negotiation, consolidation and elimination companies are available online for free at www.bbb.org.

>>  Beware of offers that sound too good to be true. There is no easy fix for reducing debt.