Avoiding Predatory Student Loan Debt Settlement Companies
Every year, millions of people find themselves in some form of debt. Oftentimes, this debt is incurred as a result of paying for a college education. As if student debt isn’t hard enough, now you have to be on your guard against companies that purport to help you settle your debt, but simply use your misery to bleed you dry of every last penny you have. These companies take advantage of people who are confused, overwhelmed, and desperately in need of financial assistance. Fortunately, we have some tips on how to avoid these predatory student loan debt settlement companies.
What Are Debt Settlement Companies?
Before we go too far, let’s answer the big question: What are debt settlement companies?
If you find yourself sinking in debt, you can use the services of a debt settlement company. According to the Consumer Financial Protection Bureau, it is the job of a debt settlement company to quite literally settle your debt on your behalf. They usually do this by paying off whatever you owe in lump sum payments that are less than the full amounts you would normally owe, and then charge you a portion of that as a fee.
The Bureau warns that even legitimate debt settlement companies can pose a risk to the consumer. Part of the process of debt settlement is that you have to cease making payments to your creditors, as a way of getting them to the negotiating table. However, this can – and likely will – incur severe financial penalties and late fees against you, even as the debt settlement company takes your case. For this reason, some creditors and collection agencies will refuse to do business with debt settlement companies. Others will step up their efforts to get back the money you owe them, even going so far as to file a lawsuit against you.
The net result is that while a debt settlement company may offer temporary relief (by telling you to stop sending payments to your creditors), you will almost certainly be in deeper financial straits before too long.
You may wonder then, what do debt settlement companies do, if not actually work on successfully reducing your loan? Reporting on a lawsuit filed against such a company by the state of Illinois, the Chicago Tribune said that the company did little more than complete and file the paperwork that consumers could have done for free.
In an article with a title that hits the nail on the head – “Should I Use a Debt Settlement Company to Help Me Deal with My Debt and Debt Collectors?” – the
CFPB offers the following cautionary signs that you should look for when considering companies that offer to settle your debt for you. Be wary of companies that:
- Charge upfront fees before working on your debts (the Chicago Tribune reported that one such agency charged its customers $1,200 upfront)
- Charge exorbitant monthly fees (averaging $150 a month)
- Promise you that your debt will be completely eliminated (as explained above, the “strategy” of you stopping payments to your creditors renders this promise all but impossible)
- Assure you that you will not be contacted by your creditors or collection agencies
- Insist you pay them, while telling you not to pay your creditors
- Imply that they have some affiliation with a government department or government program but never specify or elaborate
If you are contacted by an organization (or find one) that makes these statements (or similar ones), then you have probably stumbled upon a debt settlement company that is looking to prey on your desperate financial situation.
Are All Debt Settlement Companies Bad?
So does this mean that all debt settlement companies are bad? The United States government holds a dim view of the entire industry. The Better Business Bureau received approximately 3,500 complaints from consumers about debt settlement companies since 2007. Around the time the economic recession hit, people were in severe financial trouble and vulnerable to “get out of debt quick” schemes. Speaking to Marketplace.org, an attorney for the National Consumer Law Center explained that debt settlement companies capitalize on consumers’ relative unfamiliarity with the student loan repayment process, charging fees for materials and services that are available without charge.
The NCLC put out a report that says the sales tactics of debt settlement companies “should be [illegal]” because the companies do not make it clear that what they offer consumers is nothing special or unique. Instead, they simply resell government programs.
A 2010 report by the U.S. Government Accountability Office offered two damning conclusions:
- Some debt settlement companies are “fraudulent and deceptive” and “abusive” in their practices towards their customers.
- Most of the time, debt settlement companies do not remove all, or even most, of the consumer’s debt.
It’s important to draw a distinction between debt settlement companies and legitimate organizations that work with people to ameliorate their debt, such as credit counselors and debt management companies. They don’t make extravagant claims about wiping out every penny of your debt, and they don’t make you feel better by telling you to stop paying your creditors in the hope that your creditors will cut you some slack. Credit counselors and debt management companies go about their business not by promising to take the bull by the horns (in the style of debt settlement companies), but by working with you on finding a plan to manage your debt. They can also negotiate with your creditors to give you more time to finish paying what you owe, lower your interest rates, and even lower your overall monthly payment.
What Should You Do if You’ve Been Scammed by a Debt Settlement Company?
If you feel you have been the victim of a predatory debt settlement company for any reason – their modus operandi matches what you’ve read in this article, you’ve grown suspicious of their guarantee of quick results, or you’re worried that the stalling tactics of the debt settlement company are not endearing you to your creditors (and rightfully so) – then you can complain to the Consumer Financial Protection Bureau. Even though they will not wipe out your debt or save you from a collection agency, the Bureau is there for you, the consumer, and they will protect you from unlawful and unethical debt settlement practices.
In fact, such is the danger of scammers wanting to cash in on the (literally) trillions of dollars of student debt by promising to secure forgiveness of an entire student loan, that state governments have started to take action. Illinois, for example, became the first state to take legal action against debt settlement companies for “[duping] vulnerable borrowers into paying for help that never arrived” (from PopularResistance.com). One of the companies targeted by the government tried to pressure consumers to make their upfront payments over the phone – which is not only unnecessary (as explained above), but is also specifically illegal under Illinois law.
Reporting on how “Student Loan Scammers Seek [a] Slice of [the] $1 Trillion Pie,” the Brattleboro Reformer quoted the Attorney General of Vermont, who told consumers that the companies that call students, email them, or run late-night ads about lowering payments on student loans are not allowed to operate in the state. They deceive consumers into thinking that they are related to federal student loan programs, and charge a fee for locating a loan forgiveness program (while legitimate businesses that offer loan restructuring do not request an upfront fee).
Dealing With Student Loan Debt
Student loans are big business in America. Reuters reports (in an article entitled “Why It’s So Hard to Settle Student Loan Debt”) that an average student loan is $27,000. In July 2013, student loan debt totaled over $1 trillion across the country (from the Consumer Financial Protection Bureau), a figure higher than outstanding credit card debt. And according to the Department of Education, of the 4 million people who borrowed money for college in September 2010, approximately 600,000 of them defaulted (that is, went 270 days without making a payment).
All this can be very disheartening. You’re done with school and you want to start living your life, but it seems you can’t take a step without some reminder of the thousands of dollars you owe – and now you’ve got to worry about that phone call you had with a company that, in hindsight, seems too good to be true. But that’s why we are here for you. We can connect you with the resources and information you need on how you can best manage your student loan. Predatory student loan debt settlement companies are the last thing you need as you try and prevent your payments from overwhelming your life.