Congress targeting debt settlement firms

Ed Ward was current on his credit cards, making minimum payments on his five-figure debt, until he went to a debt settlement firm more than a year ago to try to cut his bills.

When the firm promised to bring down his monthly payments from $1,000 to $608, he allowed the new amount to be automatically taken monthly from his checking account and placed in escrow to pay bills.

But three months later, a creditor sued him, and Ward learned he was delinquent on all his bills because the escrow funds were going first toward the settlement firm's fees, he said.

"It destroyed my credit," said Ward, an Albertson limo driver.

Such stories have made the debt settlement industry the newest financial services target of federal officials. In a report last week, the General Accountability Office, Congress' investigative arm, said it posed as consumers and found widespread fraud and abuse, from claims of being linked to government programs to plans that end up costing clients more than their original debt.

The Federal Trade Commission has proposed banning upfront fees, drawing protest from the industry. Tuesday, Sen. Charles Schumer (D-N.Y.) introduced a bill to do that and more. The Consumer Credit Protection Act calls for capped fees, written itemization of services and fees, the right to cancel a settlement contract and FTC authority to regulate the industry's marketing.

There have long been complaints about such firms, and critics said they stay alive only when people are delinquent. Many advise clients to stop making payments, critics said.

"They're playing on people's anger: 'Get your bailout. The banks got theirs,' " said Nicholas Campisi, a former debt collector and now a counselor at American Debt Resources, a Northport-based nonprofit.

The Association of Settlement Companies, a trade group representing about 200 out of the nation's 800-plus settlement firms, already requires some of Schumer's proposals of its members, such as itemized services, said board member Max Bruck.

But banning upfront fees is a problem because work is done on cases before negotiations, he said. Fees are usually 15 percent of the debt, he said, and most firms want half up front and the rest in portions later.

"Most of the people are good people in the industry," said Bruck, a six-year veteran.

WHAT TO WATCH FOR

• Will the company give a written contract with all services and fees? It should.

• Does the firm give legal advice, such as bankruptcy options or what to do if a creditor sues? It should not.

• Is the success rate touted? If it sounds high, it might not be true.

• Are there promises of settlements? There's no guarantee that creditors will talk with such firms.

• How much of the debt will the firm be able to reduce? If it's high, such as 80 percent, it might be too good to be true. Most firms promise 40 to 60 percent, but critics say it's often much less.