By Erika Paz, CalMatters
Before the pandemic, Graciela Gomez relied on two jobs to meet her expenses. After losing her part-time job at Macy’s in March 2020, she had to choose between paying off her credit cards or paying her rent. She chose the latter.
“I didn’t know who to talk to, who to talk to. I was embarrassed, ”Gomez said.
An ad for a debt settlement company appeared on its social media feed promising to reduce its debt. After a follow-up, she says she got a lawsuit from one of her credit card companies in March. She is still fighting today.
As California emerges from the pandemic, some residents facing crippling personal debt, even as many of the state’s wealthiest residents have seen their wealth increase. Among the economic winners is the burgeoning debt settlement industry, largely made up of online businesses that promise to reduce personal debt by negotiating with banks and credit card companies on behalf of the customer. But consumer advocates point out that these companies often grapple with financial desperation and fail to warn customers of potential consequences, such as ending up in court.
Now California lawmakers are considering legislation that would more tightly regulate the industry after largely ignoring personal debt from credit cards and loans in pandemic era legislation focused on lease and utility debt relief. The law project reignites an eternal debate on Capitol Hill over whether alternative financial services – like payday loans, debt settlement, and credit repair – are financial predators or a necessary lifeline for Californians with little or no little credit.
Assembly member Buffy Wicks, an Oakland Democrat who drafted the bill, argues that existing federal regulations do not go far enough to protect Californians.
“Let’s make sure that if they are working with these companies, there is transparency and empowerment for the consumer in this process,” Wicks said.
How debt settlement works
After Gomez’s first phone call with ClearOne Advantage, the debt settlement company, she said she felt like the company would pay off all of its debts and that she would only need to be one. only monthly payment to the company until it pays off the balance.
“She made me feel like it was easy, like ‘We’re here to help…. Your life is going to change. It’s going to be so much easier. And I believed it,” Gomez said.
ClearOne Advantage declined to comment on Gomez’s experience. The company provided what it said was a testimonial from a satisfied customer, but declined to provide contact information so CalMatters could interview the customer.
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 sign up for a debt settlement plan make a monthly payment to a debt settlement fund. Debt settlement companies, according to Nguyen Orth, wait until the customer is in default – which can sometimes take up to six months – before they start negotiating with creditors.
Defaults must happen before the negotiation process can begin, but debt settlement companies avoid saying so explicitly, Nguyen Orth said. Debt settlement companies like ClearOne Advantage make money by charging clients a percentage of the total debt owed.
In the best-case scenario, willing creditors agree to settle the debt for an amount less than the amount owed. Once the client agrees to the new terms, the debt settlement fund will be used to pay off the debt.
The result is worse if a creditor refuses to work with the debt settlement company. As part of the program, clients sign a cease and desist letter that prohibits creditors from contacting them directly. In an effort to collect the debt, creditors will sue customers, often resulting in a judge ordering the money to be withdrawn from the customer’s bank account or paychecks.
“They come to me when they’re being chased and they say ‘Why am I being chased? I signed up for a debt settlement plan. I don’t understand, ”Nguyen Orth said.
She added that most clients don’t realize that they can negotiate with creditors on their own. Free.
“I think (debt settlement) is one of the options that needs to be there,” said Tomas Gordon, CEO of ClearOne Advantage and president of the Consumer Debt Relief Initiative, an industry advocacy organization. debt settlement. “We educate people the right way and make sure we self-monitor the industry to make sure consumers are getting the best possible results. “
As part of the registration process, Gomez provided his income, expenses, and debts to make a monthly budget. But she said she felt like she could afford to put a monthly deposit of $ 250 into her settlement fund when she really couldn’t.
The ClearOne Advantage rep also told her that they couldn’t help her if she hadn’t incurred a debt of at least $ 10,000, prompting her to list a credit card she was making payments on. regularly so that she can participate in the program.
The agreement signed by Gomez, which CalMatters reviewed, makes no mention of minimum requirements to enroll in the program, but charges a fee assessed at 25% of total debt. This means that the company ultimately plans to charge him just over $ 2,500. In June 2021, Gomez deposited $ 2,259 into its settlement fund, of which $ 1,053 was debited for service and transaction fees.
It wasn’t until Gomez was sued by Bank of America, she said, that she learned that she had defaulted on all of her credit cards and now faced a judgment from the. court.
“If I had known from day one that I could have been sued, I think there I would have stopped and tried doing more research to try to figure out what was the point of paying (ClearOne Advantage), ”Gomez mentioned.
What the bill would do
House Bill 1405 would not change the way debt settlement companies operate, but it would add more regulation. Existing federal regulations are limited to companies serving customers across state borders.
The state bill would mimic some of these federal rules, applying them to businesses based in California, as well as adding new rules such as giving customers a three-day “cooling off period” before the contract runs out. take effect.
The bill is moving forward despite almost unanimous opposition from Republicans. Several lobbies have lifted their opposition after successfully pushing for amendments, including one that would remove regulations regarding referral fees, a major source of revenue for the industry.
But before the most recent changes, the debt settlement industry had united against the bill. The Consumer Debt Relief Initiative, made up of members of the debt settlement industry, argued that new regulations would hurt the very consumers the bill attempts to protect by driving debt settlement companies out of California, leaving consumers few options.
“Why would a state withdraw debt settlement as an option for these families during this pandemic?” Said Willie Brown, former speaker and mayor of San Francisco, in a Consumer Debt Relief Initiative Video. “It’s a vital service for those who need it most.
The alternative for many families, according to Brown and the industry, is bankruptcy or worse.
“You only have bad actors left – it almost creates a black market,” said Gordon, the group’s chairman.
Assembly member Wicks disagreed. “For the bad actors, if they feel like they can’t operate in California, then they can go somewhere else,” she said. “And for the good actors, they can stay here and they can help our working families who need help.”
Gordon said he believes the bill is more beneficial to banks and credit card companies who don’t like having to negotiate customer debt reduction.
OneMain Financial, the only creditor to back the bill, declined to comment, but said in a letter of support for the invoice that their main goal is to work directly with their defaulting customers.
Loan for debt settlement
Despite federal CARES loan forbearance and a statewide moratorium on evictions to protect Californians, personal debt such as credit cards and medical bills have been largely ignored by lawmakers, leaving consumers exposed to potential predatory practices by alternative financial services.
“It’s a huge bubble of people ready to settle their debts,” said Nguyen Orth.
The debt settlement industry expects to do very well. At a meeting in February of the Consumer Debt Relief Initiative, An Accenture market analysis indicated that the industry predicts a 75% increase in the number of accounts enrolled in debt settlement services in 2021.
California’s new consumer financial protection law, which came into effect on January 1, gave the state Department of Financial Protection and Innovation new authority to regulate the industry. Agency says it won’t start tracking debt settlement companies until 2023.
Does the bill go far enough?
According to Nguyen Orth, everything ClearOne Advantage has done in this case is legal, so AB 1405 is unlikely to have changed much for Gomez. But the bill would tackle some of the more blatant practices which Nguyen Orth saw, she said, as promising unrealistic results without informing clients of possible risks or offering predatory loans that can lead to additional debt.
Gomez terminated her contract with ClearOne Advantage at the end of June, but she is still working with Bank of America to settle the lawsuit and the outstanding balance. His advice to others? Avoid debt settlement companies at all costs.
“It’s an absolute scam. They prey on people like me, ”Gomez said. “Call credit cards or collection agencies yourself… It’s easier and the money will go straight to who you owe. “
This article is part of California division, a collaboration between editorial offices examining income inequality and economic survival in California.