House bill would drive borrowers deeper into debt
payments and fund an escrow account to negotiate with the creditor. While the escrow account grows, late fees compound, interest rates increase and finance charges expand the amount of debt even more. In many cases, consumers go into default and face lawsuits, finding themselves in worse shape than before they involved the adjuster. Some end up filing for bankruptcy, the very thing they were trying to avoid. Few consumers actually complete the program but many pay thousands of dollars in fees and accrue more debt than before they engaged the debtsettlement company.
In 2004, after pressure from Ohio consumers and advocates, the General Assembly passed the Ohio Debt Adjusters Act. The statute protects Ohioans from unscrupulous debt adjusters that peddled false hope to consumers struggling with debt and charged them excessive fees. The provisions in the statute limit the fees for debt settlement services and give the Ohio attorney general authority to enforce the statue.
Even in spite of strong federal and state regulations, debt-settlement companies continue to get caught engaging in fraudulent activity. The Consumer Financial Protection Bureau, Federal Trade Commission, the Ohio attorney general and other state regulators investigate and take legal action against debt adjusters for charging illegal fees and making false claims. The last thing we need to do is roll back consumer safeguards from this industry.
For the past several years, American Fair Credit Council, the industry’s trade association, has worked to pass legislation that would lift fee caps, allowing them to gouge consumers even more. Since the 2009 FTC’s telecommunications rules prohibited debt settlers from charging up-front fees, the industry has been trying to lift state fee caps throughout the nation. They are close to getting their wish in Ohio. The House of Representatives already passed industry-backed House Bill 182, which will likely move in the Senate in the next few weeks.
The AFCC claims the Ohio Debt Adjusters Act limits consumers’ options for debt relief. That is not the case. The Ohio Debt Adjusters Act does not bar debt adjusters from doing business in Ohio. It limits the fees they can charge. In fact, there are several members of the American Fair Credit Council doing business in Ohio, including several which are registered with the Ohio secretary of state. However, there are much better options available to help consumers suffocating from debt, including:
• Negotiate the debt. Consumers can work directly with creditors to negotiate their debt. In this scenario, all payments go directly to the creditor. Consumers may also be able to receive a hardship interest rate of under 10 percent, avoid defaults which lead to lawsuits and pay off their debt faster. Nearly half of creditors and collections companies refuse to work with debt-settlement companies.
• Use credit counseling. The National Foundation of Credit Counseling, a national network of nonprofit organizations with offices in Ohio, offers debt-management programs. Counselors immediately negotiate debt with creditors, rather than waiting until the consumer has saved enough in an escrow account to begin negotiating — an industry practice that causes defaults.
• File bankruptcy. Even bankruptcy has protections that debt-settlement agreements cannot provide. Bankruptcy can protect consumers from lawsuits, which may bombard consumers when they stop paying their debtors. Also, debts reduced through bankruptcy are not considered taxable income, but they are when negotiated in a debt-settlement agreement. Customers of debt settlement companies often end up filing for bankruptcy after paying hundreds of dollars in fees that could have been used to pay down their debt.
Ohio lawmakers should protect consumers and oppose House Bill 182. Passage of the legislation would hurt Ohio consumers and drive borrowers deeper into debt. Ohioans need real solutions to support their financial stability — not industries that exploit their economic challenges.