Consumers getting in over their heads with credit card debt can lead to big profits for a variety of financial institutions. Among the worst offenders are for-profit debt counseling companies, which often take huge fees in order to negotiate with creditors on behalf of a beleaguered consumer. Now such outfits are looking for foothold in Massachusetts, which has long allowed only nonprofit companies to help consumers dig out of debt.
Massachusetts outlawed for-profit debt counselors in 1971 because of a string of abuses. Now, however, lawmakers seem open to the idea of bringing them back under a regulatory bill that doesn’t offer nearly enough safeguards for consumers.
The bill, which passed the House and now sits in a Senate committee, would require that debt management companies be licensed and offer an up-front agreement to the consumer that clearly states fees and other details about how the debt will be handled. For-profit debt counseling companies typically charge a percentage of the debt as a fee. Some demand as much as 18 percent. Yet the bill sets no fee limits. Even more surprising is the momentum the bill has gained despite the generally poor record of the industry. In a 2010 report, the Government Accountability Office noted that the percentage of consumers who successfully complete a debt settlement program is in the single digits. In other words, for more than 90 percent of customers, there is little or no gain in exchange for the fee.
Debt-settlement firms often make the appealing promise that distressed consumers can get out from under their debts by paying a negotiated lump sum at a significant discount. They often advise clients to stop paying their debts in the interim and instead deposit the money into a separate account that will eventually be used for the lump sum offer to the creditors. But in many cases, the promised settlement never comes through, creditors won’t stop calling, and consumers are left with most of the debt, fresh penalties, and worsened credit, plus the additional burden of fees to the debt-settlement company.
The need for sensible debt counseling is abundant in Massachusetts, where 48 percent of residents have a credit score that’s considered subprime. There’s already a legion of nonprofit credit counselors who work to modify terms and gradually bring clients’ finances under control. Quick debt fixes, like the ones offered by debt-settlement firms, rarely work. In legalizing them here, the Legislature would be sure to create a new category of financial victim. The Senate should stand up for consumers and keep for-profit debt-settlement firms out of Massachusetts.