Exploiting People Down on Their Luck To Make A Buck

The House Commerce Committee is set to vote on June 17th on SB 622 the Debt Settlement Services Act.  This legislation covers the licensing and regulation of debt settlement companies in Pennsylvania. 

Debt settlement services run television commercials in which companies with comforting names that include words like free, freedom, and relief offer consumers a chance to cut their debt by up to 50%!

Does that sounds too good to be true? 

The Consumer Financial Protection Bureau puts it bluntly, “Some debt settlement companies promise more than they can deliver.”  These firms often fail to settle enough debts to allow consumers to be financially better off than before they engaged the service.  Bottom line -  this type of “service” is really predatory finance.

Remarkably SB 622 contains no provisions to regulate the fees charged and requires no assessment of whether the consumer will in fact be better off before defaulting on all their loans.

Wait what? Default on all their loans?

Yes! Step one in a debt settlement is a risky gambit where consumers are told by the debt settlement company to default on all their debts.  The company then attempts to negotiate with the creditors who in the meantime have assessed charges for defaulting on the debt. The industry’s own data suggests two-thirds of the consumers who use this service fail to settle all of their debts and face substantial fees, an average of 22.5% on their outstanding balances.  And of course if the debt settlement company fails to settle all of a customer’s debts the remaining creditors are likely to take legal action because, based on the advice of a debt settlement company, the consumer defaulted on all of his or her loans.

This is a pretty complicated scheme targeted at a consumer who took on too much debt.  That brings us back to predatory finance. There is a lot of money to be made in taking advantage of people under financial stress.

Exposing vulnerable consumers to complicated financial services absent common sense rules is a recipe for disaster.  When consumers in financial trouble get deeper into financial trouble because of unscrupulous business practices, the likelihood that financial damage will spread to the local community and economy through more unpaid bills rises.

Please reach out to your representative in the House and urge them to oppose the bill. In particular members of the House Commerce Committee need to hear from you.

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