More and more frequently, we are finding that some debtors with whom we meet, have already hired a debt settlement company to attempt to resolve their debt issues, prior to coming in to meet with us. The debt settlement companies advertise that they can settle with credit card companies for a fraction of the debt by negotiating a lump-sum payment or “settlement” for less than the balance. They advise debtors to stop making payments to all the creditors with which they wish to settle with (which puts them into delinquent status) and instead pay an agreed upon sum into an escrow account every month in order to build up the necessary funds to pay the settlements. These plans typically take 36 to 48 months and during that time, creditors will keep charging late fees and interest. The balances of the accounts included in a debt settlement plan can double or even triple before they are settled. Creditors may put these accounts into collection and debtors can face collection lawsuits. Most debt settlement plan do not make it to completion and leave debtors in worse shape financially than before they entered the plan.
The Federal Trade Commission (FTC), the nation’s consumer protection agency, has issued a rule that regulates debt settlement companies. It is called the Telemarketing Sales Rule or TSR (16 C.F.R. Part 310). The TSR covers calls that debt settlement companies make in marketing their services and also calls made by potential customers to them including calls potential customers make in response to advertisements that they have placed on television, radio, the Internet, as well as most direct mail promotions.
The TSR bans deceptive telemarketing acts or practices that related to debt settlement services. Specifically, the TSR requires that a debt settlement company must disclose, in a clear and conspicuous manner, the following:
- The debtor owns the funds held in their escrow account and they may withdraw from the debt relief service at any time without penalty. The debtor must receive all funds in the account, other than those funds actually earned by the debt settlement company.
- the length of time that will be required for the service to make a bona fide settlement offer to each creditor (usually 36 to 48 months as mentioned above);
- the amount of money or the percentage of each outstanding debt that the debtor must accumulate before they will make a settlement offer to each creditor;
- the use of the debt settlement company (1) will likely adversely affect the debtor’s creditworthiness, (2) may result in being subject to collections or being sued by creditors or debt collectors, and (3) may increase the amount of money the debtor owes due to the accrual of fees and interest;
How Do I Cancel My Contract with a Debt Settlement Company
When a debtor consults with us and asks if they can cancel their contracts with a debt settlement company, we advise them that they can and recommend that they do so immediately. We also make sure to inform them that the money that has been paid into a settlement account is theirs and they should request that money be refunded to them minus any fees that the debt settlement company legally earned. If the client has authorized the debt settlement company to withdraw money from their bank account, we recommend that they contact their bank right away and let them know that they are canceling the agreement. If they are worried that the drafts might continue, then we advise that they should also close the bank account and open a new one that the debt settlement company will not be able to access.
If for some reason, the debt settlement company does not return the money that is being held in escrow, the debtor’s rights to sue to recover those funds and may be limited by an arbitration clause in the debt settlement contract. When the Supreme Court ruled in AT&T Mobility v. Concepcion 563 U.S. 333 (2011) that the Federal Arbitration Act did not allow state courts to nullify arbitration clauses in consumer cases even if those courts considered them “unconscionable,” they severely limited consumers ability to get their day in Court. However, they can still file a complaint with the New York Attorney General’s Office, which could help pressure the company into issuing a proper refund.
Typically, when facing financial difficulty, the best way to obtain a true financial fresh start is to file for bankruptcy. The results that a debtor receives from their bankruptcy filing is generally more favorable than the consequences of debt settlement. If you have any questions about debt settlement or bankruptcy in New York, please contact the Law Offices of David I Pankin at 888-529-9600 or by using our easy online contact form.