California to Regulate Booming Debt Settlement Industry

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Before the pandemic, Graciella Gomez relied on two jobs to meet her costs. After losing her part-time job at Macy’s in March 2020, she had to choose between paying a credit card and paying rent. She chose the latter.

“I didn’t know who to talk to or who to talk to. It was embarrassing, ”Gomez said.

An ad for a debt settlement company appeared in its social media feed, promising to reduce its debt. After a follow-up, she says it was a proceeding from one of her credit card companies in March. She is still fighting today.

“I didn’t know who to talk to or who to talk to. It was embarrassing. “

As California emerges from the pandemic, some residents face catastrophic personal debt, even as many of the state’s wealthiest residents are seeing their wealth increase. Among the financial winners is the rapidly growing debt settlement industry, which is primarily made up of online businesses that promise to reduce personal debt by negotiating with banks and credit card companies on behalf of their clients. clients. There is. However, consumer advocates point out that these companies often tackle financial desperation and fail to warn customers of potential consequences such as lawsuits.

California state legislatures are now considering legislation that will tighten the industry after drastically neglecting personal credit card and loan debt. Pandemic Age Act Focuses on reducing utility rents and debt. Invoice Has a long-standing debate on Capitol Hill over whether alternative financial services such as payday loans, debt settlement, and credit repair are financial predators or a necessary lifeline for Californians with poor credit or low. Is being revived.

Oakland Democrat Buffy Wicks, who drafted the bill, argues that existing federal regulations are not enough to protect Californians.

“If they’re working with these companies, make sure they give consumers transparency and empowerment in the process,” Wicks said.

Debt settlement mechanism

After her first call to debt settlement company ClearOne Advantage, she said she was impressed that the company would pay off all of its debt and that she only had to pay the company once a month for repay it. It was. Balanced.

“She made it easy to hear.” We’re here to help … your life will change. It will be very easy. “And I believe it. “said Gomez.

ClearOne Advantage declined to comment on Gomez’s experience. The company said it was a testimonial from a satisfied customer, but declined to provide Cal Matters with his contact information so he could be interviewed.

Desiree Nguyen Orth, director of the Consumer Justice Clinic at the East Bay Community Law Center, explained how most debt settlement companies work.

Customers who have a debt settlement plan pay monthly to the debt settlement fund. Debt settlement companies, Nguyen Orth said, wait for clients to default (which can take up to six months) before entering into negotiations with creditors.

According to Nguyen Oath, defaults must occur before the negotiation process begins, but debt settlement companies avoid saying so explicitly. Debt settlement companies like ClearOne Advantage make money by charging their clients a percentage of their total debt.

In the best case, the voluntary creditor agrees to settle the debt for an amount less than the amount of the debt. Once the client has agreed to the new terms, the Debt Settlement Fund will be used to pay off the debt.

The result is even worse if the creditor refuses to work with the debt settlement company. As part of the program, clients will sign a cease and desist letter prohibiting creditors from contacting them directly. In debt collection efforts, creditors sue clients and judges often order them to withdraw money from their bank accounts or wages.

“They came to me when they were being chased, and they said, ‘Why am I being chased? I signed up for a debt settlement plan. I don’t know, ”Nguyen Oath said.

She added that most clients don’t know they can negotiate with creditors. Free.

“I think (debt settlement) is one of the options we need,” said Tomas Gordon, CEO of ClearOne Advantage and President of the Consumer Debt Relief Initiative, an advocate for the debt settlement industry. . “We are educating people in the right way and purposely cracking down on the industry to achieve the best possible results for consumers.”

“Why are there states that are removing debt settlement as an option for these families during this pandemic? “

As part of the registration process, Gomez provided income, expenses, and debt to build a monthly budget. But she said she felt like she could afford to pay a $ 250 monthly deposit to her settlement fund when she really couldn’t.

A representative from ClearOne Advantage told her that she couldn’t help him without recording a debt of at least $ 10,000. We encourage you to register your regular paying credit card in order to participate in the program.

The contract signed by Gomez, reviewed by Cal Matters, does not mention the minimum requirements to enroll in the program, but charges a fee assessed at 25% of the total debt. The company will end up charging him more than $ 2,500. As of June 2021, Gomez had deposited $ 2,259 into its settlement fund, of which $ 1,053 was debited for service and transaction fees.

It was only after Gomez was sued by Bank of America that she learned that all of her credit cards had become default and said she was currently facing a court decision.

“If we knew we could be sued from day one, we would have immediately stopped and tried doing more research to figure out what would get paid (ClearOneAdvantage),” Gomez said. Mentionned.

What is the bill for

Parliamentary Bill 1405 does not change the way debt settlement companies operate, but adds more regulation. Existing federal regulations are limited to companies that serve customers beyond state borders.

The state bill mimics some of these federal regulations, applies them to California-based businesses, and adds new rules, such as giving customers a three-day “cooling off period” before entry. in force of the contract. Make.

Despite almost unanimous opposition from Republicans, the bill is on its way. Some lobbying has eliminated opponents after successfully promoting amendments, including those that remove restrictions on referral fees, which are a major source of revenue for the industry.

But before the recent amendment, the debt settlement industry was rallying against the bill. The Consumer Debt Relief Initiative, made up of members of the debt settlement industry, said the new regulations would hurt the consumers the bill attempts to protect by driving debt settlement companies out of California, leaving the consumers consumers few options. Insisted.

“Why are there states that are viewing debt settlement as an option for these families during this pandemic? Former Speaker of Parliament and San Francisco Mayor Willie Brown said. Video from Consumer Debt Relief Initiative. “It’s an essential service for those who need it most. “

The alternative for many families is bankruptcy or worse, as Brown and the industry claim.

Gordon, chairman of the group, said:

Congressman Wicks disagreed. “For the bad guys, if they feel like they can’t work in California, they can go somewhere,” she said. “And for the good actors, they can stay here and help our working family in need.”

Gordon said he believes the bill benefits banks and credit card companies that don’t have to negotiate customer debt.

OneMain Financial, the only creditor in favor of the bill, declined to comment, Letter of support Because of the bill, their main goal is to work directly with defaulting clients.

Prepare for debt settlement

Despite federal CARES loan withholding and statewide eviction moratorium to protect Californians Personal Debt Credit cards, medical bills, etc. are mostly overlooked by lawmakers, exposing consumers to potential predatory practices with alternative financial services.

“It’s a huge bubble of people ready to settle their debts,” said Nguyen Oath.

We expect the debt settlement industry to be very successful. At the February Consumer Debt Relief Initiative meeting, According to Accenture’s market analysis, the industry expects the number of accounts enrolled in debt settlement services to increase by 75% in 2021.

California’s new consumer financial protection law, which came into effect Jan. 1, gave the state’s Department of Financial Protection and Innovation new authority to regulate the industry. The agency said it won’t start tracking debt settlement companies until 2023.

Is the bill well advanced?

According to Nguyen Orth, everything ClearOne Advantage has done in this case is legal, so AB1405 is unlikely to have changed significantly for Gomez, but the bill will address a more terrible practice. Nguyen Oath appeared to promise unrealistic results without advising clients on possible risks or offering predatory loans that could lead to additional debt, she said. ..

Gomez terminated his contract with ClearOne Advantage at the end of June, but is working with Bank of America to resolve proceedings and overdue balances. What is his advice to others? Never avoid debt settlement companies.

“It’s an absolute scam. They prey on people like me, ”Gomez said. “Call your credit card or your collector yourself… it’s easy and the money goes straight to the person you are borrowing. “

Erika Paz is a reporter for Cal Matters. This article is part of California Divide, a collaboration between newsrooms investigating income inequality and financial survival in California.

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