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August 4th, 2010

Debt Settlement: Illinois Passes Law Protecting Consumers Against Scams

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Illinois Attorney General Lisa Madigan explains why consumers need protection from debt settlement scams by comparing them to doctors who make patients sicker rather than returning them to good health. Blogging on the Huffington Post, Ms. Madigan notes that passage of the Illinois Debt Settlement Consumer Protection Act enacts the strongest protection in the U.S. from unethical debt settlement operators. Madigan estimates that 30 to 40 percent of bankruptcy filings occur after consumers have dealt with debt settlement companies. Here’s how debt settlement scams typically work:

  • Consumers respond to promises that their credit card debt can be lowered.
  • Non-refundable fees are charged up front; these fees can total hundreds to thousands of dollars.
  • Consumers are told to stop paying their credit card debt and to send that money to the debt settlement company.
  • The debt settlement company sets the money aside in a trust account or escrow account.
  • When a sufficient amount of money is accumulated (as determined by the debt settlement company), the debt settlement company attempts to negotiate a settlement with the consumer’s creditors.

Meanwhile, consumers’ credit card debt grows due to late fees and accrued interest, and credit ratings fall due to non-payment. Attorney General Madigan notes that a majority of consumers drop out of these plans and end up having more debt, worse credit, and may also be sued by their creditors. The debt settlement company keeps the money it charged up front and its clients can end up filing bankruptcy.

New Law Limits Up-Front Debt Settlement Fees

The new Illinois law limits the up-front fees that debt settlement companies can charge to $50 and prohibits further payments unless debts are actually settled. Fees are capped at 15 percent of the savings realized from debt settlement. Debt settlement companies can no longer advise clients to stop paying creditors and are required to notify clients that creditors may not agree to reduce balances owed, and that debt settlement plans can negatively impact consumer credit scores.

Following in Illinois’ Footsteps

More states must take a cue from the Illinois law and take steps to shelter vulnerable consumers from scams. If you’re in trouble with debt, facing foreclosure, or both, please contact a certified credit counseling service and/or a HUD approved housing counselor. Legitimate consumer credit counseling and debt consolidation services can help you negotiate affordable payment terms while reducing or eliminating fees and finance charges on credit card debt.

Post written by Karen Lawson

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  • Chris Rocks is the Regional Director of the National Credit Federation (NCF). NCF is a nationwide membership-based organization that assists consumers recovering from a financial difficulty and those who need a significant increase in their credit score. Chris began his financial services career as a Financial Advisor helping young families with risk management and asset accumulation strategies. It was during that time that Chris realized that many of these young families also needed someone to guide their choices with regards to debt management. He made the transition into the mortgage industry where he first worked as a loan originator and later the Vice President of a small mortgage company. As Chris came across clients who had suffered through financial challenges and saw the difficulty they had in re-entering our credit driven economy, he discovered there was a real opportunity to leverage his unique background and help others. He can be contacted by visiting his personal site, GoodCreditLiving.com.

  • Francine L. Huff is the Publisher and Editorial Director of Super Savvy Publishing, LLC, which provides editorial and publishing services. She is a gifted author, freelance journalist, and motivational speaker who has entertained and motivated a variety of audiences through workshops, panels and keynote addresses. Francine is the author of The 25-Day Money Makeover for Women, which has inspired and motivated many readers to rein in poor financial habits, become good stewards over their money and work toward a debt-free life. She has appeared on a variety of TV and radio shows. Francine previously worked for the Wall Street Journal, where she was the spot news bureau chief, a news editor and a copy editor. She has interviewed a variety of financial professionals about financial issues and strives to present information about managing money in an easy-to-understand format that is accessible to people of all backgrounds and income levels.

  • Karen Lawson is a freelance writer with more than 15 years of experience working in mortgage banking and loan servicing. She holds BA and MA degrees in English from the University of Nevada, Reno. She enjoys writing informative articles about debt management and personal finance.

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