CNBC.com has picked up a story from The New York Times that echoes many warnings we have discussed several times about so-called debt-settlement firms. Our most recent peeks under the hood of this industry were in a four-part series beginning here and ending here.

McCaskill fires warning shot?

Although we covered the GAO study mentioned in the Times piece, we may have left out a nugget that the Times includes–well, even if we did mention it, it bears repeating, especially Sen. McCaskill’s parting shot:

Consumer watchdogs point to another reason customers wind up confused and upset: bogus marketing promises.

In April, the United States Government Accountability Office released a report drawing on undercover agents who posed as prospective customers at 20 debt settlement companies. According to the report, 17 of the 20 firms advised clients to stop paying their credit card bills. Some companies marketed their programs as if they had the imprimatur of the federal government, with one advertising itself as a “national debt relief stimulus plan.” Several claimed that 85 to 100 percent of their customers completed their programs.

“The vast majority of companies provided fraudulent and deceptive information,” said Gregory D. Kutz, managing director of forensic audits and special investigations at the G.A.O. in testimony before the Senate Commerce Committee during an April hearing.

At the same hearing, Senator Claire McCaskill, a Missouri Democrat, pressed Mr. Ansbach, the Usoba lobbyist, to explain why his organization refused to disclose its membership.

“The leadership in our trade group candidly was concerned that publishing a list of members ended up being a subpoena list,” Mr. Ansbach said.

“Probably a genuine concern,” Senator McCaskill replied.

Employment up or down–which is it?

Another point we made recently  (in our preceding post) had to do with confusion over interpretation of reported unemployment rates. A June 18 AP story in the  Times reinforces our point about the much ballyhooed recovery in general–and about our longstanding concern regarding confusion over the “official unemployment rate” in particular.

The hed reads: “Most State Jobless Rates Fall,” but the lede belies the headline: “Unemployment rates in a majority of states dropped in May. But the widespread declines were mainly because people gave up looking for work and were no longer counted.”

Here’s a subsequent graf about job gains: “Forty-one states and the District of Columbia saw a net increase in jobs. But that reflected national data showing a huge gain because of government hiring of temporary census workers.”

Senate stuck in filibuster mode

Also unchanged since last we posted is the Senate’s position on helping those unemployed who have reached the end of their benefits–with no significant change in the jobs picture. On June 19 the president reacted to yet another filibuster that creates roadblocks where instead we need an express lane.

In a MarketWatch.com report, Obama is quoted thusly: “”I was disappointed this week to see a dreary and familiar politics get in the way of our ability to move forward on a series of critical issues that have a direct impact on peoples’ lives.

“”Unfortunately, the Republican leadership in the Senate won’t even allow this legislation to come up for a vote.”

In other words, if filing for bankruptcy protection made sense last week, it also makes sense this week–nothing has changed, and nothing seems likely to change anytime soon.

Get informed

In that vein, here’s some tips to use when considering the benefits and drawbacks of bankruptcy protection.  Following are some highlights derived from a list at a June 6 Orlando Sentinel piece.

1. Review the many resources offered by the “official” Web sites of various federal and state agencies:
   • U.S. Department of Justice
   • American Bankruptcy Institute
   • United States Courts
   • Bankruptcy law, state-by-state
   • National Association of Consumer Bankruptcy Attorneys
2. Consider non-bankruptcy options such as consumer-credit counseling–but be sure to avoid the “debt-settlement” or “debt-repair” firms described in the GAO report.
3. Take informed action before using up all your savings or retirement funds.
4. This one is word-for-word from the Sentinel: “Don’t try to ‘game the system’ by running up credit-card charges for jewelry or other luxuries just before filing for bankruptcy — you’ll likely still be on the hook for such debt.”
5. This tip condenses three separate points from the list: Be aware that because of the financial crisis, waves of consumers are turning to the bankruptcy code for protection, and so bankruptcy law is “hot” right now; accordingly, you want to make sure you get trained, seasoned professional counsel; furthermore, such firms will often provide a free consultation to begin–this is your chance to evaluate the firm to avoid a “mill”-type operation.
6. Do not rely on creditors (credit-card companies, bill collectors, etc.) to tell the truth about the legal system or bankruptcy protection.

(mis)Leading myths about bankruptcy

In fact, misinformation is so common that certain “myths” about bankruptcy have arisen, a sort of urban legend. This attorney’s page answers each of the following myths, none of which is true:

1. Bankruptcy relief is no longer available (False: the 2005 “reform” act changed some things, but protection is still available for those who need it.)
2. You can’t file bankruptcy if you have a job (False: In fact, reliable income is a necessity to service a Chapter 13 filing.)
3. Medical bills can’t be discharged in bankruptcy (False: medical debt can be addressed, as can credit-card debt, and even personal loans.)
4. Chapter 13 plans require repayment in full of debt (False: unsecured creditors may receive payments that total 100 per cent of the debt–or zero per cent–each case is different, depending on the unique variables.)
5. People who file bankruptcy can’t get credit for 10 years (False: Although true that bankruptcy will remain on credit reports for up to ten years, many people’s finances are in such disarray that receiving bankruptcy protection can be the start of improving one’s credit score.)
6. You lose everything you own in bankruptcy (False: a small percentage of filers will liquidate a significant amount of assets, but exemptions provide for retaining “tools of the trade” and more–most filings result in little to no loss of assets, and some assets can’t be touched.)
7. Bankruptcy is a sign of personal or moral failure (False: The bankruptcy code is designed to offer a restart, a second chance, for those who have been devastated by events beyond their control such as job loss or medical emergency. See a “typical profile,” based on research by Elizabeth Warren.
8. Bankruptcy costs our society too much (False: This myth is directly traceable to a credit-industry lobbyist.)
9. There is a minimum amount of debt required to file bankruptcy (False: No minimum is necessary.)
10. Married couples must file together (False: Confusion arises most often because of states with community property laws–although it may be in a couple’s best interest for both spouses to file, each can file separately, or not all. This is best decided in conjunction with a trained, experienced bankruptcy attorney.)

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

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.

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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.

If you need immediate help, you can complete a short form at the bottom of this page.