Debts can become overwhelming at any time, but especially now, when so many are unemployed and struggling through the COVID-19 pandemic, sequestered at home with little income flowing.
Those who seek out companies to help them consolidate their debt and pay it off in three or four years often find they’ve been duped and that the company they contracted with is doing little to help diminish debt while collecting a handsome monthly payment from desperate consumers.
In many instances, simply contacting individual companies to reach an agreement can do just as much for a consumer, or more, than hiring a debt relief firm, said National Consumer Law Center Attorney Andrew Pizor.
Calling a bankruptcy lawyer is another possibility.
The federal Consumer Financial Protection Bureau works to make sure companies don’t take advantage of desperate consumers. For instance, last year the CFPB settled a lawsuit it brought against Freedom Debt Relief, one of the larger debt relief companies. The company agreed to pay $20 million in restitution to consumers affected by its practices and a $5 million civil penalty.
Pizor applauded the CPFB for acting against Freedom and forcing it to pay restitution..
“Debt settlement and similar programs offered by companies like Freedom often do more harm than good and turn out to be a waste of money,” Pizor said at the time. “Consumers should talk to their creditors directly and do their own debt settlement negotiations, or they should talk to a qualified consumer bankruptcy attorney.”
Pizor, in a recent interview, called debt relief scams “a multi-million-dollar problem.” Some states regulate how these companies operate and some limit this business to only nonprofit agencies.
The only federal law regulating such businesses relates to the Telemarketing Sales Act.
“There is a lot of evasion and deception,” Pizor said.
There is research that includes a survey of creditors that shows they do not give these debt settlement companies deals any better than if consumers call directly, he said.
Pizor recommends going to a nonprofit credit counselor who can devise a plan for a consumer, help set a budget and teach consumers how to reach out to creditors. Two of the more prominent accreditation institutions are the Council On Accreditation and the International Organization for Standardization. Nonprofit credit counseling agencies receive grants that provide an incentive for them to uphold standards. FInd a counselor accredited by one of these agencies.
Get help from your state
Pizor says people who feel they have been taken advantage of by debt relief companies can also contact their state attorney general or consumer protection department.
“They will try to get in touch with the debt relief company and try to mediate,” he said. “They won’t act as your lawyer or insist on cancelling the contract, but people do get a response. If you file a complaint with the CFPB, which can regulate and take enforcement action,” debt relief companies will respond, because they know the consequences of ignoring this federal agency, he said.
“These companies are particularly good salesmen and prey on people desperate to control their finances,’’ Pizor said. “Then, they take them for a ride.”
When to choose bankruptcy
Linda Worton Jackson, chair of the Bankruptcy/Restructuring and Corporate Transactions Groups with the Pardo Jackson law firm in Miami, said it costs no more to have a bankruptcy lawyer review your case and guide you than it does to pay a debt relief company to do it.
“It’s very difficult to know which of the debt relief companies are legit and they have many hidden fees,” she said. “The best thing to do is go to a lawyer. You are safer doing that than giving out all your personal information to a debt relief company.”
The best thing a company or individual can do is determine together the best type of bankruptcy to file or whether you are better off dealing with creditors directly, Jackson said.
“In general terms, if you are an individual or business that wants to eliminate debt and will no longer continue doing business, you just want to call it a day, you file for Chapter 7.”
Your case is immediately turned over to a court-appointed trustee who will divvy up your assets to creditors and you walk away.
The trustee will look into your records to see if you have made inappropriate transfers or determine if you have the money to pay off creditors, to make sure you really need to file Chapter. 7.
“If the trustee finds you have the means to pay back creditors, the next would be a Chapter 13, which is for individuals or small businesses with low dollar amounts of debts,” Jackson said. “On day one you file a five-year plan to pay off your creditors.” Your lawyer can help you develop that plan.
The third type of bankruptcy is Chapter 11.
“That can be for a wealthy individual or a business. It allows you to continue your business or your life and to stay in control of your assets. You don’t lose your house or business,” Jackson said. “This is the Macys and the Kmarts of the world who have repeatedly filed Chapter 11 and re-emerged. The idea in this is to file a plan which provides for payments to all your creditors and it can be done on the first day or months later.
Chapter 11 typically involves a lot of negotiation, she said.
“One of the benefits is it gives you the opportunity to put a stop on everything, including foreclosures and creditors and bring it all under one roof so you can negotiate your plan.”