Debts & Loans

More people than ever are seeking help from credit counseling firms

More people than ever are seeking help from credit counseling firms, debt settlement companies and other providers to deal with overwhelming debt. But many states still have weak licensing rules, or no rules, for companies that provide these services, potentially putting consumers at higher risk of being taken advantage of.

“Consumers are often asked to trust a company simply because it is organized as a tax-exempt corporation or happens to belong to an industry trade group,” said Mike Croxson, president of Debt Services, one of the largest debt management firms in the country. “Licensure provides an additional layer of protection against predatory companies that, as we’ve seen in Texas, Florida and elsewhere, can do further damage to consumers’ finances.”

Debt supports licensing for companies involved in providing credit counseling, debt management and debt settlement programs. Some states, such as Virginia and Pennsylvania, have licensing regulations that help protect consumers from unscrupulous organizations while also maintaining a consumer friendly, competitive marketplace for people who need these services. Other states, however, have weaker regulations, outdated laws or none at all.

For debt settlement services, for example, 20 states have no regulatory requirements so long as the debt settlement company doesn’t hold consumers’ money. This is important, because the weak economy is pushing more people beyond their financial limits, forcing them to seek help with their debt. Sixteen states don’t have licensing requirements for organizations providing debt management services. Some states have laws that haven’t been updated in decades. New Jersey, for example, is still operating under laws that were written during the Kennedy administration.

Consumers have a number of options available to them if they need help dealing with their debt:

Credit Counseling. Consumers generally are counseled on how to create a budget, pay down debt and start building an emergency fund.

Debt Management. These programs help consumers fully repay their debts, typically over a 5 year period, by negotiating with creditors to reduce interest rates, eliminate late fees and penalties, and consolidate debt.

Debt Settlement. Debt settlement programs help consumers negotiate with creditors to pay less than they owe. This can be a good option for people who can afford to pay some, but not all of the debt they owe.

Debt has seen the number of inquiries from people seeking help with their debt grow 15 percent in the last 12 months, a strong indicator that the severe recession and high unemployment is making it more difficult for many individuals to cope with their debt. Unemployment rates are above 10 percent in some parts of the country, home foreclosures are up and credit standards have tightened, all indicators that more people are struggling to get by.

“Though most organizations in our industry are trustworthy and operate with integrity, there have been some bad actors,” Croxson said. “In some cases consumers have lost money and actually had their debts increased and their credit further damaged because they trusted providers that turned out to be negligent or even criminal. Stronger state regulations would give consumers more protection from these unscrupulous, predatory organizations.”

Croxson believes a strong state regulatory framework should include:

• Mandatory licensure by an appropriate state regulatory agency.

• A clear statement by the firm of what services consumers will receive.

• A clear description by the firm, up front, of the fees it will charge consumers.

• Some assurance of ongoing support by the firm.

• A requirement that consumers will be able to talk to a real human being via phone if needed.

• Free educational materials provided by the firm.

• Periodic audits of the firm’s dealings with consumers.

“Honest providers that truly have their clients’ best interests foremost in their minds, such as Debt, should support these kinds of regulations,” Croxson said. “I urge state legislators around the country to take a good look at how they regulate – or fail to regulate – our industry during this difficult economic period.”

Consumers who live in states without strong regulations should consider, at a minimum, finding out whether the debt management firm is licensed in another state, Croxson said.