By Erika Paz
Before the pandemic, Graciela Gomez relied on two jobs to keep track of her expenses. After losing her part-time job at Macy’s in March 2020, she had to choose between paying off her credit cards or paying her rent. She chose the latter.
“I didn’t know who to talk to, who to contact. I was ashamed,” said Gomez.
An ad for a debt settlement company appeared on her social media feed, promising to lower her debt. Following the follow-up, she says she received a lawsuit from one of her credit card companies in March. She still fights today.
As California emerges from the pandemic, some residents have some facing crippling personal debt, while many of the state’s wealthiest residents have seen their wealth grow. One of the economic winners is the booming debt settlement industry, which is largely made up of online companies that promise to reduce personal debt by negotiating with banks and credit card companies on behalf of the customer. But consumer advocates point out that these companies often run into financial despair and fail to warn customers of the potential consequences, such as going to court.
Now California lawmakers are considering legislation that would more tightly regulate the industry after largely overlooking personal debt from credit cards and loans pandemic-era legislation aimed at relieving rent and utility debt. The bill revives a perpetual debate in the Capitol about whether alternative financial services — such as payday loans, debt settlement, and credit repair — are financial predators or a necessary lifeline for Californians with little or bad credit.
Assembly member Buffy Wicks, an Oakland Democrat who wrote the bill, argues that existing federal regulations do not go far enough to protect Californians.
“Let’s make sure that as they work with these companies there is transparency and consumer empowerment in that process,” Wicks said.
How debt settlement works
After Gomez’s first call to ClearOne Advantage, the debt settlement company, she said she was under the impression that the company would pay off all of her debts, and that she only had to make one monthly payment to the company until she had the balance.
“She made it sound easy, like ‘We’re here to help… Your life is going to change. It’s going to be so much easier.’ And I believed it,” Gomez said.
ClearOne Advantage declined to comment on Gomez’s experience. The company said it provided a testimonial from a satisfied customer, but declined to provide contact information for CalMatters to interview the customer.
Desiree Nguyen Orth, director of the Consumer Justice Clinic at the East Bay Community Law Center, explained how most debt settlement companies operate.
Customers who sign up for a debt settlement pay a monthly debt settlement fund. According to Nguyen Orth, debt settlement companies wait until the customer has failed to pay their debts — which can sometimes take up to six months — before starting to negotiate with creditors.
The defaults must happen before the negotiation process can begin, but the debt settlement companies avoid saying this explicitly, Nguyen Orth said. Debt settlement companies such as ClearOne Advantage make money by charging customers a percentage of the total debt.
At best, willing creditors agree to settle the debt for less than the amount owed. After the customer agrees to the new terms, the debt settlement fund is used to pay off the debt.
The outcome is worse if a creditor refuses to cooperate with the debt settlement company. As part of the program, customers sign a cancellation letter that prohibits creditors from contacting them directly. In an attempt to collect the debt, creditors will sue customers, often resulting in a judge ordering that the money be debited from the customer’s bank account or salary.
As part of the enrollment process, Gomez provided her income, expenses, and debts to establish a monthly budget. But she said she felt she could afford to put a $250 monthly deposit into her settlement fund when she really couldn’t.
The ClearOne Advantage representative also told her they couldn’t help her if she didn’t take out at least $10,000 in debt, she said — and asked her to sign up for a credit card she’d paid regularly so she could join the program. Participate.
The agreement that Gomez signed, which CalMatters reviewed, does not specify minimum requirements to participate in the program, but does charge a fee estimated at 25% of total debt. That means the company eventually plans to charge her just over $2,500. As of June 2021, Gomez deposited $2,259 into her settlement fund, of which $1,053 has been written off as service and transaction fees.
It wasn’t until Gomez was sued by Bank of America, she said, that she learned she had defaulted on all her credit cards and was now facing a court order.
“Had I known from day one that I could have been sued, I think I would have stopped there and tried to do more research to try and understand the point of paying (ClearOne Advantage),” Gomez said.
What would the bill do?
Assembly Act 1405 wouldn’t change how debt settlement companies operate, but it would add more regulation. Existing federal regulations are limited to businesses serving customers across state lines.
The state law would mimic some of those federal rules, apply them to California-based companies, and add new rules, such as giving customers a three-day cooling off period before the contract goes into effect.
The bill is progressing despite nearly unanimous opposition from Republicans. Several lobbies have removed their opposition after successfully pushing for changes, including one that would remove regulations around referral fees, a major source of revenue for the industry.
But before the most recent changes, the debt settlement industry had united against the bill. The Consumer Debt Relief Initiative, made up of members of the debt settlement industry, argued that new regulations would harm the very consumers the bill seeks to protect by driving debt settlement companies out of California, leaving consumers few options.
“Why would a state take away debt settlement as an option for these families during this pandemic?” Willie Brown, former Speaker of the House and Mayor of San Francisco, said in a… Video Consumer Debt Relief Initiative. “It’s an essential service for those who need it most.”
According to Brown and the industry, the alternative for many families is bankruptcy or worse.
“You’re just left with bad actors – it almost creates a black market,” said Gordon, the group’s president.
Member of Parliament Wicks disagreed. “For the bad actors, if they feel like they can’t operate in California, they can go elsewhere,” she said. “And for the good actors, they can stay here and help our working families who need help.”
Gordon said he believes the account is more for banks and credit card companies that don’t like cutting customer debt.
OneMain Financial, the sole creditor backing the account, declined to comment, but stated in a statement: letter of support on the account that their main goal is to work directly with their debtors who fail to meet their debts.
Ready for debt settlement
Despite the federal CARES bill failing to make loans and a statewide eviction moratorium intended to protect Californians, personal guilt such as credit cards and medical bills have been largely overlooked by lawmakers, exposing consumers to potential predatory practices by alternative financial services.
“That’s a huge bubble of people ready for debt settlement,” Nguyen Orth said.
“They come to me when they’re being sued and say, ‘Why am I being sued? I signed up for a debt settlement. I don’t get it,’” Nguyen Orth said.
She added that most customers do not realize that they can negotiate with creditors themselves. Free.
“I think[debt settlement]is one of the options that should be out there,” said Tomas Gordon, CEO of ClearOne Advantage and president of the Consumer Debt Relief Initiative, a debt settlement advocacy group. “We are educating people appropriately and making sure we audit the industry itself to ensure consumers get the best results possible.”
The debt settlement industry expects to do very well. At a February meeting of the consumer debt relief initiative, a market analysis from Accenture said the industry expects a 75% increase in the number of accounts enrolled in debt settlement services by 2021.
The new California Consumer Financial Protection Law, which went into effect Jan. 1, gave the State Department of Financial Protection and Innovation new powers to regulate the industry. The agency says it will not track debt settlement companies bedrijven until 2023.
Does the bill go far enough?
According to Nguyen Orth, everything ClearOne Advantage did in this case is legal, so it’s unlikely AB 1405 would have changed much for Gomez. But the bill would address some of the more? blatant practices Nguyen Orth has seen, she said, such as promising unrealistic results without informing clients of the potential risks or offering predatory loans that could lead to further debt.
Gomez terminated her contract with ClearOne Advantage at the end of June, but she is still working with Bank of America to settle the lawsuit and the outstanding balance. Her advice for others? Avoid debt settlement companies at all costs.
“It is an absolute scam. They hunt people like me,” Gomez said. “Call the credit cards or collection agencies yourself… It’s easier and the money goes straight to who you owe.”
The post Legislation Targets the Debt Settlement Industry – Davis Enterprise appeared first on Notesradar.
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