Debt settlement companies negotiate with creditors to reduce the amount of debt a borrower owes, unlike debt management companies or credit counselors, who work to achieve an affordable monthly payment. Consumer complaints about debt settlement companies to the Illinois Attorney General have skyrocketed in recent years. Consumers reported that many debt settlement companies promised to reduce debts substantially and charged high up-front fees but had low success rates in achieving debt relief. Additionally, some settlement companies advised borrowers to stop paying their creditors and instead save their money to pay a negotiated lower debt, which can result in penalty fees that substantially increase their total debt load, lower credit scores, and result in creditor lawsuits.
The Debt Settlement Consumer Protection Act, introduced by Senator Jackie Collins (D-Chicago) and Rep. Marlow Colvin (D-Chicago) and championed by Attorney General Lisa Madigan and State Treasurer Alexi Giannoulias, puts in place a set of consumer protections to address these consumer concerns. The Act prohibits all up-front and monthly fees except for a $50 application fee, caps fees at 15 percent of savings achieved from settling a debt, stops debt settlement companies from advising consumers to stop paying their creditors, allows for the cancellation of a contract at any time, and requires licensing and bonding of debt settlement companies by the Illinois Department of Financial and Professional Regulation. Additionally, the Debt Settlement Act creates a fund to pay restitution to consumers who have lost money through a debt settlement company. The act takes effect immediately and the Illinois Department of Financial and Professional Regulation has issued proposed rules to enforce the new law.
“The Debt Settlement Consumer Protection Act puts in place important protections that prevent unscrupulous debt settlement companies from taking advantage of consumers by charging high up-front fees without providing any debt relief in return,” said Woodstock Institute President Dory Rand. “However, consumers can avoid high fees entirely and develop a debt relief plan using low- or no-cost non-profit credit counselors.”
The Federal Trade Commission (FTC) also recently released new regulations regarding debt settlement companies. The new FTC rules prohibit up-front fees and improve disclosure requirements. Unlike the Illinois rules, the FTC provisions apply only to debt settlement agreements reached over the phone since the new rules are amendments to the FTC’s telemarketing regulations.