Advocates: Ohio bill may hurt consumers

A bill pending in the Ohio General Assembly seeks to address struggling consumers buried under a pile of debt. Proponents of the bill say provisions would give consumers more options to work out their problems. Opponents fear it might put them in a bigger hole.

Senate Bill 120, introduced by Republican state Sen. John Eklund from the Chardon area of northeast Ohio, would make it easier for debt-settlement companies to operate in the state.

Consumers can use debtsettlement companies in an effort to negotiate reductions in debt, reduce interest rates or waive late fees, Eklund said in his testimony before the Insurance and Financial Institutions Committee, when the bill was introduced this summer.

He said consumers in trouble with debt now have basically two choices: filing for bankruptcy or using a nonprofit consumer creditcounseling service that can reduce costs such as fees and interest rates on debt, but not reduce the total debt.

“Bankruptcy protection can eliminate debts, but leaves a black mark on the creditworthiness of individuals and married couples. Credit counseling can be a great option, but only in instances where someone has the means to repay the entire debt,” he said.

He said the legislation would change state law governing nonprofit consumer credit-counselors to include provisions for debt settlement, which can include negotiations that could reduce the principal owed.

But consumer groups and a lawyer who represents consumers warn that debtsettlement companies come with a risk of putting consumers in deeper trouble.

“The industry has a track record of flat-out lying and scamming and running off with the money,” said Emily White, an attorney who represents consumers.

Freedom Debt Relief, the

largest U.S. debt-settlement company, has been sued by the federal Consumer Financial Protection Bureau and accused of misleading consumers, not informing them of their rights and not settling debts as promised. The company denies wrongdoing.

White said current law puts a cap on the fees such companies can collect. The legislation would lift those caps and make it more profitable for debt-settlement companies to operate in the state, she said.

These companies typically tell consumers to stop making payments on their debts and instead make payments into a fund that accumulates and can be used by these companies to negotiate settlements with debtors, she said.

“By encouraging debtors not to pay their debts for months or years while money accrues for settlement, the debt-settlement industry exposes consumers to collections calls, damage to credit and debt-collection lawsuits,” she said in testimony she gave to the committee.

“In the meantime, late fees and interest on the debts continue to accrue. These are the very things most consumers are looking to debt settlement to avoid. Raising the cap on fees will only postpone the time it takes for consumers to build enough funds to commence negotiations and obtain debt relief.”

Kalitha Williams, with Policy Matters Ohio, told the committee that there are better options for struggling consumers, including working directly with creditors or getting help from nonprofit debt-management programs.

“Even consumers who file bankruptcy have protections that debt settlement agreements cannot provide,” she said. “Bankruptcy can protect consumers from lawsuits, which may bombard consumers when they stop paying their debtors.”