Giannoulias Gets Bill Passed to Cut Down on "Debt Settlement" Firms

Debt Settlement Consumer Protection Bill Passes Senate
FROM THE TREASURER'S OFFICE


A bill pushed by State Treasurer Alexi Giannoulias aimed at cracking down on debt settlement companies that make false promises of big savings while sinking consumers further into debt passed the Illinois Senate on Thursday and now moves to the Governor’s desk.

“For debt settlement companies who prey on vulnerable citizens it’s the ‘Wild West’ out there,” said Giannoulias, whose office worked closely with the Illinois Attorney General Lisa Madigan to craft the legislation. “It’s an industry that has operated unchecked, misled consumers and failed to deliver. This legislation will rein in these unscrupulous practices and protect the financial well-being of Illinois residents.”

The economic downturn and high unemployment rate has spawned the rapid growth of debt settlement companies nationwide that claim to help distressed borrowers by negotiating to pay off their debt for pennies on the dollar.

The Illinois Debt Settlement Consumer Protection Bill, which passed the Senate by a 56-1-0 vote, prohibits all upfront and monthly fees, except for a one-time $50 application charge, and caps fees at 15 percent of the savings achieved from settling a debt. Currently, debt settlement companies collect roughly 15 to 20 percent of the consumer’s total debt upfront, so a consumer who owes $15,000 in credit card debt the company could pay $3,000 upfront before a single debt is settled.

Promising savings of up to 60 percent, debt settlement companies typically tell clients to stop paying their credit card bills and re-route that money into an account that will later be used to negotiate a settlement. The accumulation period can take 12 to 18 months while fees and interest continue to accrue.

As a result, many consumers are sued by their creditors before a settlement is reached, leading to judgments, wage garnishments and liens. In most cases, consumers cannot obtain refunds if they cancel their contracts, even if none of their debts were actually settled.

The debt settlement bill prohibits companies from advising consumers to stop making payments to creditors, allows consumers to cancel a contract at any time and prohibits deceptive promises of specific debt reduction results.

It also requires the companies to provide written analysis of a consumer’s financial situation prior to entering into a contract and warnings on how a consumer’s credit may be negatively impacted by a debt settlement agreement.

In addition, the Illinois Department of Financial and Professional Regulation will be required to license debt settlement companies for the first time.

State Sen. Jacqueline Collins, the Senate sponsor of the measure, said debt settlement companies can no longer be allowed to prey on consumers in crisis.

“This legislation will curtail the fraudulent, abusive and deceptive practices of debt settlement companies that seek to enhance their bottom line at the expense of working families struggling with substantial personal debt,” Collins said.

State Sen. Iris Martinez, who co-sponsored the measure, said the bill is an important safeguard for consumers who go in search of debt relief only to find their financial situations worsened by dishonest tactics.

“This bill will help ensure that consumers go into debt settlement agreements with their eyes wide open to the potential risks and that more of the money they put into the agreement goes towards the resolution of their debts,” Martinez said.

Durbin Statement on the Passage of the Credit Card Accountability, Responsibility, and Disclosure Act

From the Office of U.S. Senator Dick Durbin

[WASHINGTON, D.C.] – Assistant Senate Majority Leader Dick Durbin (D-IL) released the following statement today after the Senate passed the Credit Card Accountability, Responsibility and Disclosure Act. This bill establishes strong consumer protections by preventing unfair interest rate increases and exorbitant fees; enhancing consumer disclosures; protecting young consumers; and strengthening oversight of credit industry practices.

“For too long, the credit card industry has taken advantage of their customers with hidden charges and misleading terms designed to do one thing – keep people from digging their way out of debt.”

“Now we give consumers a fighting chance. The bill the Senate passed today puts fairness, accountability and common sense back into credit cards.”

“This bill bans unfair rate increases, makes companies play by reasonable rules and magnifies the fine print so consumers aren’t blindsided by their monthly bills.”

“Americans have already lost too much in this recession; this bill helps ensure that they get a fair shake from credit card companies.”

Today’s legislation includes a Durbin initiative that will now require credit card statements to display the amount of time it would take to pay off the balance and the amount of interest a credit cardholder would pay if the cardholder only makes the minimum payment each month. Known as the “Durbin Box”, this information will warn cardholders of the true cost of allowing their card balances to grow over time.

The legislation is now being sent to the House of Representatives for approval before being sent to the President for signature. He is expected to sign the bill before Memorial Day.