There’s a big difference between debt consolidation and debt settlement. Unfortunately, when newspapers run stories listing the misdeeds of debt settlement firms, the average consumer doesn’t make the distinction. Consumers instead lump debt consolidation companies and debt settlement firms into the same category of companies that can’t be trusted. Such is the case with the Debt Settlement Consumer Protection Act, a bill introduced in the Senate by Sen. Charles Schumer, a Democrat from New York. As part of the debate over the bill, Schumer and his Senate colleagues have discussed in depth some of the allegedly unethical practices in which debt settlement companies have engaged. When consumers read news stories summarizing this debate, they rarely separate the world of debt consolidation from that of debt settlement. This is unfortunate; debt consolidation may not be perfect, but it is a legitimate tool for consumers who are overwhelmed with debt.
Bad Debt Settlement Behavior
The charges leveled at debt settlement companies are pretty disheartening. Many firms are using the federal government’s bailout of the banking industry to bring added credibility to their companies. The Government Accountability Office has introduced into the Debt Settlement Consumer Protection Act debate audio recordings of debt settlement companies bragging to their clients that their companies had government approval and were receiving bailout funds. Obviously, these debt settlement companies were not actually the beneficiary of U.S. bailout dollars. Then there are the typical charges filed against these companies: They charge exorbitant fees for their services. They often encourage their clients to stop paying their bills, something that further damages their credit scores. And some even take money from their clients and then do nothing at all.
Schumer’s bill requires debt settlement firms to use written contracts that fully disclose all the services that they will provide. Contracts would also have to spell out in good faith the total amount of fees that consumers will pay for their debt settlement services. Lobbyists for the debt settlement industry aren’t in favor of the changes. But it’s hard to argue with the increased transparency that Schumer’s bill would provide.
The Debt Consolidation Difference
Debt consolidation is a different beast. When taking out a debt consolidation loan, consumers pay one single monthly payment that they can afford, instead of several to various lenders. The debt consolidation firm then pays off the consumer’s creditors from this monthly payment. By taking out a debt consolidation loan, consumers can stave off the calls from collection agencies while steadily paying off their debts. Debt consolidation loans do lower consumers’ credit scores, and they often come with high interest rates. But for some consumers, they are the best option for eliminating debt.