Buffalo, NY -- (ReleaseWire) -- 03/07/2018 -- Question: What industry receives the top number of consumer complaints at the Federal Trade Commission (FTC) every year? Answer: Debt relief.
Each year the FTC goes to bat for debtors by taking companies in the debt relief industry to court. In 2017 alone, the agency mailed thousands of checks to people who paid up front for debt relief and ended up further behind due to the fees and false claims made by debt consolidation, debt settlement, or debt relief companies.
But the checks from the FTC barely made a dent in what the individuals had lost. Scott Laughlin, vice president, Community and Creditor Relations of the nonprofit Consumer Credit Counseling Service of Buffalo, Inc., named the three top local offenders — Freedom Debt Relief, CareOne, and National Debt Relief.
"We've had the most clients come to us after trying to correct their situation through these three for-profit companies. Debt relief or consolidation programs (which are almost all for-profit) claim they can save you thousands," Laughlin said. "In fact, even if they reduce your debt with your creditors, the fees they charge combined with the interest and late fees that accrue on your debt until it is completely paid off will end up costing you just as much."
For example, said Christopher J. Grover, attorney, Jeffrey Freedman, PLLC, if a debtor owes $15,000 on three credit cards and reaches out to a debt relief company, the company will start taking monthly payments until they are able to negotiate the first debt. In the meantime, none of the debts are being paid and will continue to accrue penalties and increased interest rates commonly above 20 percent. Once the debtor pays enough to the agency to "settle" the first debt, it could be several months down the road and the balance could be several hundred dollars more than the original amount. This still leaves the other two balances, which have not been touched, and continued to increase while the first debt was settled. The result is higher settlement amounts and longer time in the plan. This is a process that can work in theory, but rarely works in reality.
Another big problem is that debt settlement companies make promises they can't fulfill. Often times the individual may have several debts, but the debt settlement company can only help settle a few, not all of the accounts. Ultimately, the person is going to be sued by some creditors, however, debtors are never told this by the debt relief company.
"An additional downside," Laughlin said, "is that the debtor's credit rating won't improve because the debt was negotiated down. Whereas, debtors who work with agencies like CCCS get back on track financially are able to improve their credit ratings."
Once debtors have contracted with these debt relief or debt consolidation companies, all mail regarding their credit card bills goes directly to the company, so the clients don't know the true state of their accounts until an account ends up in court. In the case of debt validation companies, Laughlin said, clients pay thousands of dollars to have their accounts disputed, and there's no guarantee the debt validation company will be able to get results. They can still end up owing the original amount, plus any fees and interest that have accrued over the time of the dispute.
Additionally, the forgiveness of debt through a debt settlement company is considered imputed income. The creditor claiming the capital loss will send the debtor a 1099, and the difference between what was owed and what has been paid will be considered income by the IRS.
"These companies prey on people who are in dire financial straights and don't know what to do," Grover said. "Typically, debtors end up coming to our offices and filing bankruptcy in the end. Whether they file Chapter 7 (straight bankruptcy) or Chapter 13 (a plan to repay creditors often a percentage of what is owed) the debt that is discharged is not taxable income to the filer."
Legitimate not-for-profit credit counseling services are highly regulated and frequently audited by the New York State Department of Financial Services, whereas debt relief, consolidation and settlement companies are not.
"They would never pass the scrutiny of a state audit. They strictly exist for their own profit, at the expense of those who fallen upon hard times," Laughlin said.
About Jeffrey Freedman Attorneys, PLLC.
Jeffrey Freedman Attorneys, PLLC., has been assisting Western New York residents with overwhelming debt for more than 35 years. The firm also handles Social Security Disability, Veteran's and long-term disability, employment discrimination, and personal injury cases.
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