Video: Do debt settlement companies save you money?

  1. Transcript of: Do debt settlement companies save you money?

    MEREDITH VIEIRA, co-host: Back at 7:43. This morning on TODAY INVESTIGATES , a cautionary tale on popular debt settlement companies that have seen a boom in business during the financial meltdown. NBC 's senior investigative correspondent Lisa Myers has details. Lisa , good morning.

    LISA MYERS reporting: Good morning, Meredith . Debt settlement companies promise to negotiate with your creditors to get them to settle for a fraction of what you actually owe, typically 40 to 60 cents on the dollar. But do they really deliver? We took a look at one such company and at the experience of some of its clients.

    MYERS: The commercials seem to be everywhere.

    MYERS: Debt settlement companies claiming they can get your creditors to settle your debts for less than you owe.

    Ms. HELEN BLASS WILSON: Kayla , no texting.

    MYERS: Helen Blass Wilson and her husband, Jim , were struggling with tens of thousands of dollars in credit card debt after paying his father's medical bills. With three children, they simply could no longer make the financial pieces fit.

    Ms. WILSON: No matter what we did, nothing was working.

    MYERS: She went on the Internet and found Credit Solutions .

    MYERS: That company , based in Dallas , claimed it could settle your debts for half what you owe and leave you debt free within three years. Helen signed up. She says the company told them to stop paying credit card bills, ignore warning notices, not to talk to creditors at all.

    Ms. WILSON: They said don't pay anything. We're going to take care of everything for you. And I trusted them.

    MYERS: Then came harassing calls and e-mails from creditors. She says she repeatedly called Credit Solutions for help.

    Ms. WILSON: And I would tell them, we need help. We -- I'm scared. I don't know what to do. And they said, we understand, we understand. Don't worry about it. We'll deal with them.

    MYERS: But after a year with Credit Solutions , the Wilsons say their debt situation was worse. Their total debt higher because of late fees and penalties. One of their creditors sued them; others threatened to. Their credit rating was ruined. And they'd paid Credit Solutions up front fees of $6,000.

    Mr. JIM WILSON: Which is money that we could have used to spend...

    Ms. WILSON: Mm-hmm.

    Mr. WILSON: ...to -- on our credit card bills.

    MYERS: Credit Solutions says it generated 11 settlement offers for the Wilsons . The Wilsons acknowledged the company did get them some settlement offers , but say they couldn't afford most of them, not on top of Credit Solutions ' fees. Credit Solutions claims 99.5 percent customer satisfaction . But the Better Business Bureau of Dallas told us it's received more than 1600 complaints in the last three years and gives the company a grade of F.

    Mr. CHRIS BURGESS (Better Business Bureau of Metropolitan Dallas, Inc.): We've seen so many complaints that you have to wonder what is Credit Solutions actually doing.

    MYERS: The company disputes its F grade and says that most BBB complaints have been resolved. Credit Solutions denies telling the Wilsons to stop paying their credit card bills, but other former customers told us the same story. So we decided to call the company ourselves. Legally, we can only play our side of the conversation. I said I was thinking of signing up. If I do, what do I do about my next credit card bill? Do I go ahead and make that payment? Answer: "No, no, you don't. You stop right away." So I stop making all credit card payments? Answer: "Exactly, exactly." An undercover investigator for the Government Accountability Office recently called Credit Solutions and heard this...

    Unidentified Man: One hundred percent of the clients who have been successful have stopped paying their bills.

    MYERS: Credit Solutions is just one of about 250 debt settlement companies now handling more than $11 billion of credit card balances and taking 5 to 20 percent in fees, whether or not the debts are reduced. The industry as a whole is coming under increasing attack.

    Mr. WILLIAM BINZEL (National Foundation For Credit Counseling): The business practices that are prevalent within the debt settlement industry are abusive, deceptive and unfair to most consumers.

    MYERS: A debt settlement industry trade association blames a few bad apples.

    Mr. DAN GOLDBERG (The Association of Settlement Companies): There have been a couple bad actors that unfortunately have been allowed to taint the entire industry . That's unfortunate. The vast majority of debt settlement companies provide very valuable services to consumers.

    MYERS: The attorneys general of three states, Texas , New York and Missouri , have all charged Credit Solutions with deceptive practices and false advertising. Credit Solutions says it can't comment directly on those charges but says the claims are unfounded. The Texas AG reported the company 's own data shows that over 80 percent of the debts enrolled in its program don't get settled. Credit Solutions says that number is grossly inaccurate. Former employees of the company , which is now headquartered in this building in Dallas , tell NBC News that though it's a legitimate company that does settle some debts, its business model depends on misleading customers. They say the company is designed to profit from the desperation of customers rather than to help them. These two former employees asked that their identities be disguised. They're suing Credit Solutions for unpaid overtime but say the main reason they quit was because the company was taking advantage of customers. Did you ever see anything that you thought was deceptive or misleading?

    Unidentified Woman #1: Every day, all day. I was told, stick to the script. It's designed to confuse the consumer. As long as you do that, you'll make sales.

    MYERS: What did you eventually come to believe that the company was really doing?

    Unidentified Woman #2: Their top priority is to help themselves. Helping people get out of debt is secondary.

    MYERS: Credit Solutions declined our request to visit and interview CEO Doug Van Arsdale . Instead the company provided its own video and statement.

    Mr. HEATHER CARMICHAEL (Credit Solutions): The almost $1 billion we have settled for our consumers to date and the real settlement letters and video testimonials on our Web site shows that we produce life-changing results for our consumers.

    MYERS: In one testimonial on the company Web site , a woman named Rose says she gave Credit Solutions a try after seeing a positive report right here on the TODAY show .

    Unidentified Woman #3: So I watched that piece on the TODAY show and I sat down and listened.

    MYERS: One problem -- we could find no record of the TODAY show airing a report recommending Credit Solutions . We asked the company months ago to put us in touch with a few satisfied customers. Besides Rose , they did not. The Federal Trade Commission is moving to crack down on debt settlement companies and to ban up front fees such as those charged the Wilsons . After the Wilsons ' complained, Credit Solutions returned $ 1200 but kept $4800 of the fees they paid. Unfortunately, the Wilsons have now filed for bankruptcy.

By Herb Weisbaum ConsumerMan
msnbc.com contributor
updated 7/8/2010 1:38:37 PM ET 2010-07-08T17:38:37

Millions of Americans are drowning in debt. If you believe the ads — with their bold claims of success — a debt relief company will help you pay off your bills for pennies on the dollar.

The ads are everywhere:

  • “Be debt free in as little as 24-48 months!”
  • “Erase debts 50 to 70 percent or more!”
  • “Legally get debt down to zero.”

Congressional
regulation?

It sounds so easy. Consumer advocates and government fraud fighters say it’s nothing like that. They see an industry where deceptive and abusive practices are common.

“These are for-profit companies and they are looking to profit off your vulnerability,” warns Linda Sherry with Consumer Action.

“Desperate consumers are paying thousands of dollars with no guarantee that even one penny of their debts will ever be settled,” says Susan Grant, director of consumer protection at the Consumer Federation of America.

The Federal Trade Commission says people who sign up with debt relief or debt settlement companies often end up with more debt than when they started.

“To be sure, some debt relief services do help consumers reduce their debt loads,” FTC Commissioner Julie Brill told Congress recently. “In too many instances, however, consumers pay hundreds or thousands of dollars for these services but get nothing in return.”

Commercial relief companies are very different from traditional nonprofit credit counseling agencies. While the non-profits work with people to better manage their money and pay off their debts over time, the commercial operators promise to dramatically reduce what you owe.

Also, with a nonprofit counseling service, the monthly fee is normally based on your ability to pay. Most debt relief companies want their money — or a good portion of it — up front. Their fees are often 14 to 18 percent of the total debt.

Debt relief companies often tell their clients to stop paying their bills. Instead, the customer is instructed to pay a certain amount each month into a separate bank account set up by the company. They promise that once there’s enough money in the account, they will negotiate “lump sum” settlements with creditors. During this time, of course, the interest charges and penalty fees keep piling up on those unpaid accounts.

“You will definitely wind up in worse shape if you are paying your bills and then stop paying them,” warns Gail Hillebrand, a financial services expert at Consumers Union. “Creditors get tired of waiting and they will give your account to a collection agency or sue you.”

The debt relief industry claims the criticism is unjustified. The Association of Settlement Companies says its members saved consumers about $640 million in 2009.

In a recent letter to the FTC, the association’s vice president, Robert Linderman, insisted his industry treats its clients “respectfully and responsibly while producing significant benefits for consumers that far outweigh the cost of realizing those benefits.”

What’s really going on here?
Marceline White, executive director of the Maryland Consumer Rights Coalition, went secret shopping at some online debit relief companies. She tells me she didn’t like what she heard. White says it was obvious the people who claimed to be financial counselors were sales people who just wanted her to sign up on the spot.

“When you ask them direct questions, they don’t really respond with direct answers,” she says. “They follow their script and they tell you things that sound great. They would often tell me that I could cut my debt in half, but they couldn’t give me many detailed specifics about how the program would work or what a fee structure would look like.”

In a report released in April, White concludes: “Instead of getting the promised services, consumers typically end up with less money, more debt, a worse credit score, and dwindling options.”

Earlier this year, the U.S. Government Accountability Office had its investigators call 20 companies posing as potential customers. GAO reports it found “fraudulent, abusive and deceptive practices ... such as claiming unusually high success rates for their programs — as high as 100 percent.” The report notes that FTC and state investigations have typically found that less than 10 percent of the clients successfully complete these programs.

What needs to be done? 
Since 2003, the Federal Trade Commission has sued 20 debt relief companies. The settlements in these cases have helped more than 475,000 victims get some of their money back. The FTC says more investigations are underway.

The Federal Trade Commission plans to modify its Telemarketing Sales Rule to protect people who contact debt relief agencies. The proposed rule change would require salespeople to give potential customers more information and prohibit them from making misrepresentations. You would have to be told how long it will take to get relief, how much the service will cost and the company’s true success rate.

Most importantly, the FTC is proposing to prohibit any debt relief service from getting paid up front. They could only charge a fee after the debt was settled as promised.

The industry opposes any attempt to ban advance fees. It claims such a ban would be unfair and would hurt consumers. 

My two cents
I hate companies that prey on people who are down on their luck. Debt relief companies promise the moon, but all too often fail to deliver. Of course, clients pay, regardless of the results. That’s just not fair.

If a debt settlement company can provide a real service, then they should get paid. If they can’t do that, they don’t deserve a dime.

I’m hopeful the Federal Trade Commission’s final rule (expected in the next few months) targets the bad apples in this industry and puts them out of business.

Want to get real help?Contact a reputable nonprofit credit counseling agency. Look for one that belongs to the National Foundation for Consumer Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.'

More information

© 2013 msnbc.com.  Reprints

Vote: Have you ever used a debt relief company?

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.74%
$30K home equity loan FICO 5.37%
$75K home equity loan FICO 4.71%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.91%
10.91%
Cash Back Cards 16.32%
16.36%
Rewards Cards 15.94%
15.96%
Source: Bankrate.com