The Cumulative Costs of Predatory Practices

States should:
• Require more detailed and accurate evidence when debt buyers file lawsuits.
• Tighten evidentiary requirements for obtaining a judgment.
• Require judicial review to ensure protection of exempt funds to pay debt-collection judgments and
settlements and to ensure the consumer’s ability to pay.
• Vigorously enforce laws and regulations against debt collectors, debt buyers, and debt collection
law firms. Ensure more consumers have legal representation.
Debt Settlement
Debt-settlement companies offer the promise of settling a consumer’s debt for a fraction of what
they owe. Debt-settlement companies offer to negotiate down the outstanding debt owed (usually
from credit cards) to a more manageable amount so that a consumer can become debt free.
Unfortunately, debt-settlement programs carry significant risks that may result in consumers
becoming even worse off.
In order to enroll into debt-settlement programs, the service provider requires the consumer to
default on their debt, which typically results in fees, increased interest rates, and sometimes even
lawsuits from creditors. Even after assuming all this risk, consumers are offered no guarantees; in fact,
some creditors refuse to negotiate with debt-settlement companies at all. Even if a settlement is
reached on one debt, the fees accumulating on other debts may wipe out any savings the settlement
might have achieved. Moreover, a consumer unable to keep up with the new settlement arrangement
risks falling back into default, and now without the fees paid to the debt-settlement company for
negotiating the agreement.
In 2010, FTC promulgated a new debt-settlement rule, which included a ban on collecting fees in
advance for debt-settlement services. As a result, today debt-settlement companies may collect fees
only when a settlement agreement has been reached and at least one payment has been made by the
consumer to the creditor. The FTC rule also provided greater protections for the dedicated accounts
in which consumers save for future settlement agreements and standards for what debt-settlement
companies must disclose to prospective customers. In addition, it prohibited particular marketing
tactics, which it found to be misleading. Although these consumer protections improved debt-settlement
programs for consumers, consumers must settle at least two-thirds of the debt they enroll in a
debt-settlement program to benefit, a result that many will not achieve.
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The State of Lending in America & its Impact on U.S. Households