When New Yorkers have more credit card debt than they can cope with, they sometimes turn to debt-settlement companies, hoping to stay out of bankruptcy. Usually the agreement with the company involves debtors redirecting payments meant for creditors to the debt-settlement company until it can reach an agreement with the debtors’ creditors. The snag: It’s often just a get-rich-quick scheme for the debt-settlement company because it charges all kinds of fees, even if it isn’t negotiating with the creditors. Meanwhile, debtors unknowingly fall behind on their loan payments and possibly default.
The government doesn’t take too kindly to debt settlement either, and on October 3rd, the Consumer Financial Protection Bureau (CFPB) announced that it had filed a consent order with Meracord LLC, a debt-settlement payment processor, with a federal district court. The CFPB alleged that Meracord collected and processed illegal upfront fees for 11,000 customers on behalf of debt-settlement companies across the country since October 2010. 5,000 customers never reached a settlement. According to the order, Meracord will pay a civil penalty of $1.376 million based on violations of the Federal Trade Commission’s Telemarketing Sales Rule, which prohibits pre-settlement payments to debt-settlement companies.
While we should be hopeful that the CFPB is right that taking out the payment processor at the top will prevent debt-settlement abuse, it’s still necessary to ensure people understand the risks of debt settlement. For one, Telemarketing Sales Rule that the CFPB relied on to bring Meracord to the table, does not apply to Internet transactions. Many debt-settlement companies operate distantly from their customers, making it harder to sue them if they wrongly take money from debtors. Also, even if a settlement is struck, debtors might be surprised to find that they must pay income tax on the forgiven debt.
Debt settlement isn’t always fraudulent or futile, but if you are severely in debt, discussing the situation with a New York bankruptcy lawyer will help you understand your options, as well as which ones are less costly than others.
For answers to more questions about debt settlement, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices act Bruce Weiner for a free initial consultation.
