Claims of 'Becoming Debt-Free' Fall Flat for Consumers
Some Credit Solutions of America clients say debt grew under guidance.
DALLAS, July 24, 2009— -- In these troubled economic times, it seems as if it's impossible to turn on the radio without hearing an ad for debt settlement.
"We'll help you settle your debts for pennies on the dollar," the commercials promise.
There used to be about 20 debt settlement companies in the United States. There are now closer to 2,000. They sprang up after federal law changed, making it harder to qualify for bankruptcy, and they have proliferated in this down economy.
So "Nightline" wanted to know, what is debt settlement? How does it work? Is it a good choice for consumers?
To find out, we visited Credit Solutions of America, the largest debt settlement company in the country. At its Dallas-area headquarters, we saw employees ringing bells and cheering every time they persuaded a credit card company to settle somebody's debt for less than what they owed. When we visited with our cameras, the noise was deafening. But thousands of unhappy customers have complained about the company.
Former customer Karen Moore said all she heard was silence. "I had absolutely no contact with them for over a year," Moore said. "And that was when I called them and told them I wanted to discontinue their service."
After having children and going through a divorce and moving two years ago Moore found herself deep in debt. That's when she saw something about Credit Solutions on TV. When she looked into it, the program sounded promising.
"You can likely become debt-free within three years or less," stated Credit Solutions on one of its videos. On its Web site, the company claims it can help clients reduce their debts by up to 50 percent of what they owe.
Moore signed up, and said that the first thing Credit Solutions told her to do was stop paying her credit card bills, which, according to a study by the National Consumer Law Center, is standard advice in the debt settlement world. Instead, Moore said the company told her to save a chunk of money that could be used to make an offer to the credit card companies to settle her debts once and for all.
But that savings account didn't accrue fast enough, Moore said, because, in the meantime, Credit Solutions was automatically deducting its own fee -- 15 percent of Moore's total debt -- from her account. In the first three months, the company deducted roughly a third of the fee from her bank account and then the ensuing balance over the course of the next 14 months.
Moore remained in the Credit Solutions program for 20 months, and paid the company's full 15 percent fee, yet Credit Solutions did not initiate a single debt settlement for her. And because she wasn't paying her credit card bills, the late fees and penalties piled up, causing her debt to soar from $13,000 to $18,000. Meanwhile, her credit score plunged.
"I'm out of pocket $2,088," Moore said. "And nothing to show for it." She said it's money she could not afford to lose given that she was in debt in the first place. "Absolutely not. Who can afford to lose money?" she said.
Former Customers File Class Action
Moore is one of many. Attorneys have filed a class action on behalf of potentially thousands of former customers who claim they were hounded by debt collectors and sued by creditors when they stopped paying their bills.
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