In this report
Foreclosure come-ons
Hard-sell reverse mortgages
High-fee debt settlement
A credit card for anyone
Uninsured savings accounts
Faces of foreclosure: Video report
Also in This Issue
This article was featured in the March 2009 issue of Consumer Reports Magazine.

High-fee debt settlement


Marissa Ruiz, 40, of Pasadena, Calif., was struggling to make minimum payments on more than $10,000 worth of credit-card debt in May 2007 when she saw an online ad from Debt Settlement USA that persuaded her to sign up. "They said they'd work with your creditors to reduce your total debt and get it all paid off, and that's what I wanted to do," says Ruiz, a single parent supporting four children, ages 11 to 17, on a modest income as a children's social worker.

She says the company told her to stop sending payments to creditors, a tactic often used by debt-reduction companies. Instead she was supposed to save $141.80 per month and tell Debt Settlement when she had at least $1,000 so that the company could begin negotiating discounted payoffs with lenders. The company deducted $121.54 from her checking account as the first of 10 monthly payments required for fees, Ruiz says. She'd handed over more than $600 by the time she quit the plan five months later because she believed she was getting nothing in return, other than being hounded by calls from bill collectors.

Debt Settlement USA's president, Jack Craven, says his company contacted Ruiz's creditors in July 2007 to notify them that she had granted the company limited power of attorney. He says she was not advised to stop paying creditors. Ruiz disputes that, and the written instructions she received from Debt Settlement state: "Do not speak to creditors." Ruiz says she contacted Debt Settlement to end its involvement. The company says that it tried to follow up but that she did not respond.

Ruiz then sought help from Clearpoint, a nonprofit financial-counseling agency that she had also spotted on the Internet. The credit counselor didn't require fees to help her develop a budget and contacted her creditors to discuss a realistic repayment plan. Ruiz says she negotiated directly with some lenders, such as Washington Mutual and JCPenney, that would agree to settle her bills for less than half of what she owed if she could pay the settlement amount in a few timely payments.

To earn the money to do that, she took on a part-time job. In one year, she slashed her debt from almost $13,000 to $3,000. "It hasn't been easy, and it still shocks me that I did it, but it feels great," Ruiz says. "Now when I hear ads on the radio all the time from these kind of companies, I get so angry because I don't want anyone else to get sucked in like I did."

People using settlement companies could face problems in the time before debt negotiations usually begin. The original debt might soar as missed payments lead to penalty fees and other charges, and the credit rating plunges further.

Regulators say that under the typical arrangement, companies charge up-front fees totaling 15 percent of the debt to be settled, a monthly service fee of $50 and if they do reach a settlement, a contingency fee of 20 percent or more of the amount they've allegedly saved. And the Internal Revenue Service might consider forgiven debt to be taxable income.

"Most consumers end up quitting these programs within the first two years after being subjected to constant collection calls and paying fees that can run into the thousands while receiving none of the benefits they were promised," says Googel, the assistant attorney general in West Virginia.

Wesley Young, legislative director of the Association of Settlement Companies, a trade group, says that 40 to 55 percent of consumers complete the programs but that lack of savings discipline is the most significant factor in the dropout rate. But in a May 2004 case against debt-settlement services brought by the Federal Trade Commission, a court found that less than 2 percent of consumers enrolled in the defendants' debt-negotiation programs, 638 out of 44,844, completed them.

In the past two years, West Virginia has charged nine debt-relief companies with violating state law by charging excessive fees for their services, along with other violations. The companies agreed to stop doing business with West Virginia residents and to refund $735,000 in payments collected from 490 residents.

What to do instead

Consumers struggling with credit-card debt should first consider negotiating directly with creditors. "Now is a better time than ever before to do this because card issuers are finally realizing that if we, their customers, go under, they will go down with us," says Curtis Arnold, founder of, a site that evaluates credit cards. "So they are reaching out to offer repayment plans to card members carrying significant debt loads."

Chase Card Services spokeswoman Tanya Madison says Chase will negotiate with some debt-settlement companies at a cardholder's request but will not offer more favorable terms than the customer would receive by negotiating directly with the bank. People needing help can find a nonprofit credit counselor through the National Foundation for Credit Counseling ( Those counselors will divide a set monthly payment among creditors to pay off the balance in full over time at reduced interest rates. Based on financial circumstances, the service might be provided free or for set fees: an enrollment charge of no more than $25 and a monthly fee of no more than $50.

Posted: February 2009 — Consumer Reports Magazine issue: March 2009