As millions of people struggle financially because of the pandemic and its impact on the economy, many are turning to debt consolidation and debt relief programs they see on television and the internet. Apparently wanting to not file bankruptcy, victims of these debt relief programs find they’ve only traded one debt crisis for another.
In 2017 the nation’s largest debt relief program, Freedom Debt Relief, was sued by federal regulators, alleging violation of consumer protection laws. In 2019 the Consumer Financial Protection Bureau (CFPB) reached a $25 million settlement with the company after it agreed to pay a $5 million civil penalty and to repay its clients $20 million. CFPB said the company had illegally charged its clients in advance for its services, hid from clients that several major banks have a policy never to work with debt settlement programs and charged fees even when debts were never settled.
The program used by Freedom Debt Relief at the time it was sued by CFPB is typical of how many of the programs work: Debtors pay monthly fees to a company instead of paying creditors directly. The money supposedly builds up in an account used to negotiate with creditors. But many debtors discover most of their monthly payment goes to high fees charged by the companies (Freedom was charging fees between 18-25% of the client’s debt). Since debtors have stopped paying their debts, the added interest and late fees mean their debt balloons and the amount of money required to settle the debt increases beyond what they can afford. Any settlements made can result in tax problems because the debt forgiveness is treated as income. Those creditors who don’t settle continue debt collection and when the debtor is sued, the debt relief company provides little to no assistance with the lawsuits. The end result is that debtors still need to file bankruptcy only after they’ve paid thousands of dollars in a failed attempt at debt settlement.
Some companies, after seeing the enforcement against Freedom Debt Relief, now use a different scheme where it “consolidates” either the total debt or some portion of it through a new signature loan that the debtor repays, often at the same or higher interest rate as their original credit debt. If any debt is forgiven it can still result in tax liability for the debtor.
Before signing up for any debt relief or consolidation programs contact us about how it compares to filing bankruptcy.