The classic debt settlement scam works like this: Before a single
debt is settled, the company requires you to pay a series of
non-refundable upfront fees, often 15 to 20 percent of your total
credit card debt, adding up to thousands of dollars. These fees
include monthly payments into an escrow account, supposedly for use
in negotiating pay-offs with your credit card companies. In
addition, the debt settlement company tells you to stop making your
credit card payments based on the false theory that this will make
your credit card companies more likely to accept a deal.
Debt settlement companies often do not begin negotiations until you
have saved a sufficient amount to pay a settlement, usually 12 to 18
months after entering the program. By this time, it is too late.
Many debt settlement customers end up being sued by one or more of
their credit card companies, resulting in court judgments, wage
garnishments, and even liens on their homes, leaving them in far
worse financial shape than they were in when they enrolled in the
program.
A new law pushed by Attorney General Lisa Madigan clamps down on the
debt settlement industry’s abusive practices and requires all debt
settlers to provide common-sense consumer protections if they want
to do business in Illinois. This tough new law:
• Prohibits all upfront and monthly fees, except for a one-time $50
application fee;
• Caps fees at 15 percent of the savings achieved
from settling a debt, ensuring that a
debt settlement company only gets paid when it does what it promised
to do;
• Prohibits debt settlement companies from advising consumers to
stop paying their
creditors; and
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• Allows consumers to cancel a contract at any time, with a prompt
refund of fees.
If you come across a debt settlement company that fails to offer one
or more of these legally required protections, it is a sure sign you
are dealing with a scam. Stay away. Even if you find a company that
appears to comply with the law, you should seriously consider trying
one of these alternative sources of help instead:
• Contact your credit card companies directly to see if they
offer repayment programs for
struggling consumers. Many credit card companies offer these
programs.
• Talk to a reputable credit counselor. To find a legitimate
credit counselor in your area, consult the National Foundation for
Credit Counseling at www.nfcc.org or 1-800-388-2227. Also make sure
that the company and its credit counselors are licensed and bonded,
as required by Illinois law. To check whether a credit counselor is
licensed, visit the Web site of the Illinois Department of Financial
and Professional Regulation and select “Debt Management” in the
“License Class” search field.
Remember—before dealing with any type of credit counseling firm,
check their record with the Better Business Bureau. You can also
check with the Illinois Attorney General’s Consumer Fraud Bureau by
calling 1-800-243-0618 (TTY: 1-877-844-5461).
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