Part 2, Life after bankruptcy: First, be aware of Senate hearing, GAO report on perils of ‘debt-settlement industry’

May 11th, 2010 by Mike Hinshaw

If your credit rating is already shot, the hit from bankruptcy may be negligible. It might fall some more, but if it’s already too low to qualify for good loans, then it may also be low enough to cause problems in a job search. (Remember, though: potential employers are supposed to ask permission before running a credit check. Furthermore, legislation is being proposed that would restrict such practices only to certain, appropriate jobs and industries.) In such cases, gaining bankruptcy protection may be the quickest way to start rebuilding your credit score.

As mentioned in Part 1, when considering your options be especially wary of advertising and offers from so-called Debt Settlement companies. The problems of that “industry” have become so widespread that a U.S. Senate committee recently held a hearing, which produced deeply disturbing testimony.

GAO reports to Senate committee

A full archived version of the April 22 hearing, “The Debt Settlement Industry: The Consumer’s Experience,” can be heard here, in an archived file of the U.S. Senate Committee on Commerce, Science & Transportation, chaired by John D. Rockefeller IV (D-WV). [NOTE: The video does not start until the 23:02 mark; start it, then move the slider to avoid waiting.]

In 2009 the committee asked the Government Accountability Office (GAO) to investigate industry practices and report findings to the committee. The result was a covert operation beginning in November,  in which GAO agents posed as distressed consumers and contacted what they thought were 20 different companies: However, in at least one case, the companies were linked in mysterious fashion that would not be apparent to the average consumer.

The summary of the GAO report describes its methodology: “To achieve these objectives, GAO conducted covert testing by calling 20 companies while posing as fictitious consumers; made overt, unannounced site visits to several companies called; interviewed industry stakeholders; and reviewed information on federal and state legal actions. GAO did not use the services of the companies it called or attempt to verify the facts regarding all of the allegations it found.”

Highlights of report

In the same summary, the GAO highlights its findings: “GAO’s investigation found that some debt settlement companies engage in fraudulent, deceptive, and abusive practices that pose a risk to consumers. Seventeen of the 20 companies GAO called while posing as fictitious consumers say they collect fees before settling consumer debts--a practice FTC has labeled as harmful and proposed banning–while only 1 company said it collects most fees after it successfully settles consumer debt. (GAO was unable to obtain fee information from 2 companies.) In several cases, companies stated that monthly payments would go entirely to fees for up to 4 months before any money would be reserved to settle consumer debt. Nearly all of the companies advised GAO’s fictitious consumers to stop paying their creditors, including accounts that were still current. GAO also found that some debt settlement companies provided fraudulent, deceptive, or questionable information to its fictitious consumers, such as claiming unusually high success rates for their programs–as high as 100 percent. FTC and state investigations have typically found that less than 10 percent of consumers successfully complete these programs. Other companies made claims linking their services to government programs and offering to pay $100 to consumers if they could not get them out of debt in 24 hours.”

Once tracked down, the company making the “24-hour offer” backed off that outrageous claim, saying it was “a typo” that should have read “24 months.”

The full GAO report is available, as well as audio tracks of the undercover phone calls. Frightening stuff.

News accounts, ‘affinity scams’

Also available are worthwhile news accounts: from The Washington Post and the Los Angeles Times, which includes a very noteworthy statement from Gregory Kutz, the GAO’s lead investigator, who told the committee that consumers not only get swayed by exaggerated claims of success but that “after paying big up-front fees, often running to several thousand dollars, many consumers end up deeper in debt than they were before seeking help.”

Another striking aspect picked up by the Times indicates that sometimes the shady companies operate as “affinity scams.”

“Also ‘particularly despicable,’ Kutz said, was that three of the companies used Christianity to target customers. Investigators visited one of those companies, A New Beginning Financial located in a strip mall in Orange, where an agent told them that it was a nonprofit ministry, with profit funding missionary trips overseas.”

Debt-settlement myths

Another story about the hearing,  from a personal finance writer at the San Francisco Chronicle’s online site, is actually more valuable for a link it provides to an article titled “8 myths about settling credit card debt.” Here’s their eight myths, with our takeaway for each.

  • Myth No. 1: Anyone can get their credit card balance cut in half: the takeaway is that, yes, you can call and ask, but you’ll “get in line,” and the bank will want documentation of your particular hardship.
  • Myth No. 2: I have to pay someone to help me settle my credit card debt: No you don’t, and neither do you “have to pay” someone to file bankruptcy. The difference, of course, is that bankruptcy involves the federal bankruptcy code, which is more complex since the 2005 reform act (which was passed at the urging of banks and credit-card company lobbyists).
  • Myth No. 3: All debt settlement companies are the same: No, it’s possible to find legit companies–but red flags include their demanding large up-front fees, counseling you to stop paying–and pay them instead. Also, beware two statements here: “You won’t be asked to do that if you choose a TASC member. They never handle, manage, or otherwise control their client’s funds, to avoid even the appearance of impropriety.” That’s been claimed, but not proven. The TASC sent no spokesperson to the Senate hearing.
  • Myth No. 4: The money I send to the debt settlement company is safe: No. As the article says, “You’re taking a big risk. They could mismanage your money or make an offer that is not in your best interest.
  • “There goes your money and your credit score, and you have nothing to show for it.”
  • Myth No. 5: Debt settlement won’t hurt my credit score: No. Again, quoting: “The truth: Debt settlement can hurt your credit score almost as much as bankruptcy would.”
  • Plus, you could wind up owing more than when you started, subject to actions from the original creditors and the debt settlement company, too.
  • Myth No. 6: Using a debt settlement company won’t cost much: Quoting: “The truth: It will cost more than you think by the time you finish paying the settlement company and you pay a higher cost for credit in the future.”
  • Myth No. 7: Debt settlement or bankruptcy are my only options when I can’t make my credit card payments. Credit-card companies may work with you, given proof of hardship. There’s also nonprofit credit counseling agencies if all you need help with is vigorous budget control.
  • Myth No. 8: When the negotiations are done, I’ll be out of debt. No–you could wind up with a new creditor: the debt-settlement company.

In part 3, we’ll take a look at the point of view that bankruptcy is always a bad idea, no matter the circumstances.


It’s true that the bankruptcy reform act of 2005 changed many aspects of the law for those needing protection and also for attorneys who practice bankruptcy law. If you’re considering filing for bankruptcy, it’s important to receive counsel from not only trained bankruptcy attorneys but also from experienced bankruptcy attorneys. Bankruptcy offers many consumers powerful tools for starting over, but it can be a complex process–and timing the submission of your petition can be crucial to your ongoing success, for years to come. We have background information available as well as a simple form that will get you started today. Please notice some terms seem similar on your first reading, so don’t hesitate to click back and forth to get a feel for the terminology and the distinctions between different programs.

Perhaps debt elimination is best for you. If so, start here.

Maybe debt consolidation is better for you: In that case, start here.

If you already have exhausted the preceding information, you may be ready to consider invoking protection from the bankruptcy code–if so, read here.

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