By: Attorney Matthew J Richburg
The collection industry is seeing a growing number of organizations operating nationally who are representing themselves as "debt relief" companies. These organizations advertise that their purpose is to assist consumers in dealing with their debt. Some of these businesses are non-profit organizations, but many are for-profit.
Consumer Credit Counseling Services ("CCCS") are generally non-profit organizations that operate by negotiating with creditors for a reduced monthly payment on each of the consumer’s debts. This often includes a reduction or elimination of the contractual interest rate as well. The consumer pays into a fund, and the CCCS takes money out of that fund to pay the creditor over time. If the CCCS is diligent in working with creditors, often their services are helpful to the consumer.
Debt settlement companies are generally for-profit organizations that attempt to negotiate a lump sum settlement with each individual creditor. Often this requires the consumer to pay significant up-front money into the fund for the consolidator’s fee before the consolidator will negotiate with creditors. The fee may also be a fixed percentage of the consumer’s total debt, or sometimes a percentage of the consumer’s debt that the consolidator is able save by settling the debt for less than the full balance owed. Often these fees are taken by the debt consolidator before any of the money is paid to the creditors. It can be several months or years before the fee is paid. Meanwhile, the creditors are being ignored and the claim goes to collections, or a lawsuit is filed against the consumer.
Sometimes, the debt settlement company borders on giving legal advice, which may constitute the unauthorized practice of law if that advice is not coming from a licensed attorney. Consumers are sometimes told to ignore their creditors and stop making payments until they have enough money in the settlement account controlled by the debt settlement company. This often gets the consumer sued, because it can take several months or more to gather enough funds over and above the fee taken. The creditor is left to send the claim to collections and/or sue because no contact is made to resolve the debt. Form letters or legal pleadings are provided to consumers designed to assist in delaying or stalling litigation. This also borders on legal advice, because the consumer is often being encouraged by a non-lawyer, or a lawyer not licensed to practice law in a particular state, to file a form answer denying the claim. Only licensed attorneys are allowed to give legal advice.
Although there are legitimate counseling services available to consumers, there are unscrupulous ones as well. Attorneys general throughout the country are investigating many of these outfits to try and curb the abusive ones. Consumers should be wary of companies that make promises that seem unrealistic, or companies that demand significant up front money payable over a long period of time, before they will provide any real debt relief service.