New law cracks down on debt settlement fraudÂ
Springfield, IL – A bill pushed by the Illinois State Treasurerâ€™s Office aimed at cracking down on debt settlement companies that make false promises of big savings while sinking consumers further into debt was signed into law Tuesday.
â€œFor far too long, debt settlement companies have operated like itâ€™s the Wild West out there. This legislation will require that debt settlement companies play by the rules and not take advantage of Illinoisans who are struggling during these difficult times,â€ said State Treasurer Alexi Giannoulias. â€œIt will rein in these unscrupulous practices and protect the financial health of Illinois residents.â€
The economic downturn and high unemployment rate have 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 new legislation 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. Prior to this law, debt settlement companies were allowed to collect roughly 15 to 20 percent of the consumerâ€™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 told clients to stop paying their credit card bills and to re-route that money into an account that would later be used to negotiate a settlement. This accumulation period took anywhere from 12 to 18 months while fees and interest continued to accrue.
As a result, many consumers were sued by their creditors before settlements were reached, leading to judgments, wage garnishments and liens. In most cases, consumers could not obtain refunds if they cancelled their contracts, even if none of their debts were actually settled.
The new debt settlement law, crafted by the Treasurerâ€™s Office in collaboration with Illinois Attorney General Lisa Madigan, 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 consumerâ€™s financial situation prior to entering into a contract as well as warnings on how a consumerâ€™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 of Chicago, the Senate sponsor of the bill, said debt settlement companies could no longer be allowed to prey on consumers in crisis.
â€œThis law will curtail the fraudulent, abusive and deceptive practices employed by many debt settlement companies that seek to enhance their bottom line at the expense of working families struggling with substantial personal debt,â€ Collins said.
State Rep. Karen Yarbrough of Broadview, who sponsored the bill in the House, said the law will provide important safeguards for consumers from dishonest debt settlement tactics.
â€œConsumers will now have the protections they need to make informed decisions about how best to resolve their debts as well as the tools they need to fight back against unscrupulous debt settlers,â€ Yarbrough said.