Wonder why the debt consolidation and settlement industries have such bad reputations? Maybe it’s because they seem to prey on desperate people during challenging economic times. This might be why the Better Business Bureau has reported receiving more than 3,500 complaints from consumers about debt settlement companies since the recession began. The large number of these complaints – often from consumers who paid money to debt settlement companies only to not see their debt levels drop at all – has encouraged a growing number of states to enact new legislation to regulate the way these companies operate. Illinois is in line to become the next.
Debt Consolidation vs. Settlement
To be fair, there’s a big difference between debt consolidation and debt settlement, though consumers tend to lump these services into the same category. Debt settlement companies negotiate with their customers’ creditors, hoping to reduce the amount of debt that their clients eventually have to pay back. Debt consolidation companies pass out loans that combine their customers’ debts into one monthly payment, a payment that their clients can afford to make every 30 days. The debt settlement companies receive the greater number of clients. Customers often report that these companies have not been able to reduce their debt by as much as they promised. Sometimes, the companies charge clients and are then unable to reduce their debt at all.
New Illinois Law
In Illinois, legislators passed a bill that would prevent debt settlement firms from charging for their services until they actually negotiate lower debts for their clients. The amount that the companies do charge consumers can’t be more than 15 percent of what these consumers saved by going with the debt settlement company. Illinois state attorney general Lisa Madigan helped draft the new rules, which are awaiting a signature for Gov. Pat Quinn. She has long argued that some unethical debt settlement firms charge consumers hefty fees without following through on their promises. By forcing debt settlement companies to defer their payments until they actually provide a service, Madigan says, Illinois can end this practice.
Debt Consolidation A Better Option?
Consumers who face a large amount of debt will have to choose between debt settlement and debt consolidation. Debt consolidation certainly comes with its share of disadvantages: Debt consolidation loans usually come with high interest rates, and these loans will negatively impact consumers’ credit scores. On the other hand, debt consolidation loans are sure things. A debt settlement company may not be able to negotiate a good settlement for its clients. A debt consolidation loan, if consumers pay the installments on time, will always eventually eliminate consumers’ debt.