Debt Consolidation: Rulings Can Make Consolidation Safer

It is easy to view the world of lawyers and debt counseling from either a “glass is half-empty” or “glass is half-full” perspective. Fortunately, an optimistic attitude is not out of place in today’s financial society. Courts increasingly are helping consumers benefit from honest credit counseling, by forcing debt management companies to go beyond merely keeping their contracts. Consumers have the right to fair treatment.

As an example of the legal issues relevant to debt consolidation and consumer counseling, consider the following two court rulings.

In the first case, ACORN, an agency that works for better housing opportunities for low- to moderate-income families, took their case to a California court. ACORN argued on behalf of several people who had consolidated their debt through Household International, a company whose contract put very strong limitations on the actions a borrower can take in the instance of a complaint -- especially in the case of a default. The court ruled that there was an imbalance of power between Household and the home-owners who consolidated their debt. It determined that it is unfair to limit the rights of borrowers’ to initiate a class action, or to limit them to going into arbitration rather than a courtroom.

In the second case, known as “Luna”, a lawsuit was brought against Household Finance in Washington State. Area banks were accused of “up-selling” borrowers’ loans by making it impossible for a client to obtain a lower-interest loan from another company. Again, Household tried to use a clause that restricted borrowers’ rights to challenge the up-selling in court. A court determined that the clause was unfair and against Washington State consumer law. To prevent up-selling in your own situation, ask an expert if an interest rate is so high that you will be prevented from refinancing.

Cases such as these are a breath of fresh air. Borrowers can expect increasingly more access to courts if necessary, especially through class action suits that represent people in similar situations. This reality will pressure some consolidators to become more upfront with borrowers about all of the terms of the agreement – especially if something does not go as planned. Debt consolidation will always be a game of balancing benefits against risks, and borrowers need to be aware of the courses of action of available to them in the event of a dispute.

The irony of taking advantage of people in debt, by playing on the same weaknesses that caused them to go into debt in the first place, probably was not lost on the courts in these cases. Hopefully deceitful counseling companies will hear the court’s message loud and clear. Consumers can use these cases as a lesson to be learned:

• Do not succumb to playing the victim when it comes to solving your debt problems.
• Ask about your specific rights as outlined in the contract, in case something goes wrong.
• Ask that any promises not in the debt consolidation agreement be put in writing.
• If you are falling behind in your payments, or if you receive a foreclosure notice, contact a lawyer.