Two Flawed Options for Consumer Debt Relief Offer Little Help

To say that Americans have been hard hit by the global economic crisis is an understatement. Since the downward financial spiral began in 2008, many millions of jobs have been lost, unemployment rates have been some of the highest seen since the Great Depression, bankruptcy filings are at an all-time high and there have been a record number of foreclosures of both residential and commercial properties.

As more people find themselves struggling to make mortgage payments, unable to pay for medical expenses, facing mounting credit card bills and otherwise living paycheck-to-paycheck (or, as is increasingly common, living from one unemployment benefit payment to the next), debt settlement or consolidation is looking like an attractive option. Many people see debt settlement companies as the only thing standing between them and bankruptcy, foreclosure and vehicle repossession.

Countless homeowners are also pinning their hopes on the slim chance of a mortgage refinance or negotiation, reasoning that they will be able to get back on their financial feet if given a lower monthly payment or a short respite from payments. Unfortunately, these options are not panning out for most people, as evidenced by the steady increase in mortgage filings - an estimated 4.2 million homes are now being foreclosed upon or will be in the near future, with about 4 million more expected by the end of 2012. This is, of course, on top of the more than 6 million homes already foreclosed upon.

Federal Government Programs - Too Little, Too Late?

The federal government has acted to try to turn an economic corner, though critics say that their efforts are too little, too late. Making Home Affordable (MAH), the Obama administration's highly publicized loan modification program, has sadly helped less than 500,000 homeowners modify unmanageable mortgages and still keep their homes. Another government program, the Home Affordable Foreclosure Alternatives Program (HAMP), offers assistance to people who simply cannot continue to make payments and are seeking a short sale or deed-in-lieu of foreclosure to find a faster resolution to their pressing financial programs.

Federal Action on the Foreclosure Crisis

The ineffectiveness of the MAH program has lead many - among them the Attorneys General of all 50 states to dig deeper into the foreclosure crisis. Among the questions that need to be answered:

  • Are all state and federal guidelines governing foreclosures being followed?
  • Are banks foreclosing upon the right properties?
  • Why have foreclosures been proceeding so quickly in recent months when in the past they took much, much longer, and that was in a slower market?
  • Have the circumstances of each individual loan and its payment history been adequately analyzed?
  • Will a moratorium on foreclosures across the nation resolve the issues that led to the housing crisis in the first place?
  • Would a moratorium on foreclosures force banks to lessen their rigid requirements for seeking refinances and/or modifications, particularly when mortgages are "underwater" (i.e., the value of the home is now less than the amount owed one the mortgage)

The Obama administration has been uncharacteristically mum about the possibility of implementing a nationwide moratorium on foreclosures, even for a short time. This is in spite of the overwhelming public support for such a measure, notably support that is coming both from financially struggling homeowners and those who are in no present danger of losing their homes. As proponents of a foreclosure ban correctly state, an abundance of foreclosures in a given area is devastating to property values for everyone living there, not just the cash-strapped ones.

New Federal Laws Combat Improper Acts of Debt Settlement Companies

After a lengthy investigation into the huge influx of complaints against debt settlement companies - complaints rose nearly 20 percent between 2008 and 2009 - the Federal Trade Commission (FTC) passed legislation earlier this year limiting the sales actions of debt settlement and collection companies. Common criticisms of these companies are that they make false promises to cut debts in half, do not disclose the significant fees charged for their services, fail to reveal the significant negative impact that debt settlement can have on a credit rating and that the process can easily take years to complete, with even longer to correct credit score damage.

The new rules, while tougher, still only apply to debt settlement transactions occurring over the telephone. Companies doing business over the Internet or in-person are not bound by the more restrictive regulations. As part of the new restrictions, debt collection or settlement companies:

  • Cannot charge an upfront fee for their services
  • Are not allowed to make promises to "slash" a particular portion of a consumer's debt
  • Must disclose the full cost of the service and the amount of time it is expected to take to resolve the debt-related issues
  • Need to provide information about the possible consequences that a debt consolidation or settlement program could have on a consumer's credit rating

What Can You Do?

If you are struggling with debt, you have many options. Government programs like the MAH or HAMP might help, as might a debt settlement program. Filing for Chapter 7, 11 or 13 bankruptcy protection could also be appropriate for you. With your financial future at stake, seek the advice of an experienced attorney in your area to learn more about your legal rights and any options you may have to resolve your financial difficulties.