The chief of staff at the Camp Lejeune Marine base on Wednesday asked North Carolina legislators to ban debt settlement companies, arguing that they hurt the military personnel and their families who use their services.
A bill to stop them from operating in the state passed the N.C. House in May in what sounded like a unanimous voice vote. The bill has passed several committees in the N.C. Senate, but it has not been sent to the floor for a vote.
The companies say they help people who are struggling with heavy debt get their debts reduced and paid off. A ban “would eliminate a critically important tool that thousands of North Carolinians depend on to address their unmanageable unsecured debts,” said spokesman Steve Boms for the American Fair Credit Council. The organization represents debt-settlement companies.
Camp Lejeune’s chief of staff, Col. Nicholas Davis, and other critics argue that the debt settlement companies prey on desperate people who have tens of thousands of dollars in debt and ultimately leave many customers worse off — sometimes with more debt than before at higher interest rates.
In his letter Wednesday to the General Assembly, Davis said the ban is needed to allow “service members to focus on their mission without the distraction and financial harm caused by these companies.”
On Monday, President Michael Lord of the N.C. State Employees’ Credit Union also urged lawmakers to pass the ban.
“The catastrophic financial and emotional effects on the lives of people, including many of our members, caused by the unfair and abusive ‘bait and switch’ practices of certain industry debt settlement service providers have come to our attention,” Lord wrote.
A state law from 1963 prohibits what at the time was called “debt adjusting.” It had some limited exemptions.
Out-of-state companies have exploited the exemptions, said Republican state Rep. Julia Howard of Mocksville. Howard is a high-ranking member in the House and the lead prime sponsor of House Bill 1067, “Modernize Debt Settlement Prohibition.”
Industry representatives and consumer advocates discussed in June whether they could compromise on the bill but reached no agreement, said Bons of the industry Credit Council and Al Ripley of the N.C. Justice Center. The Justice Center is a public policy organization that supports the ban.
How debt settlement works
The debt-relief company ads on television and online tell potential customers that if they sign up for their services, the companies will negotiate with their lenders to lower their total debt. And they’ll make a plan to get the total debt paid off.
The customers are told to stop making payments to their creditors and instead send their money to the debt services company, said Ripley and bankruptcy lawyer Ed Boltz of Durham. Boltz’s clients include people who have gotten into trouble with the firms.
The payments are to build up a fund to eventually pay off the debt, Ripley and Boltz said, and also include fees to the debt-settlement company.
One of the problems with this process, Ripley said, is that some credit card companies never negotiate to lower the bills. Further, the lenders sue when the customers stop paying their bills, Ripley and Boltz said.
The lenders then win judgments and liens against the customers.
Another problem: If a credit card company concludes that a customer isn’t going to pay the bill anymore, it tells the Internal Revenue Service. Then the value of the unpaid debt gets added to the customer’s taxable income.
Ripley and Boltz said two of Boltz’s clients, an older couple in Durham, accrued nearly $73,000 in credit card debts from medical expenses, and they did not want to file for bankruptcy. According to paperwork that Boltz and Ripley shared, the Freedom Debt Relief company told the couple their debt could be lowered to between approximately $56,600 and $62,600.
The couple started paying $1,244 per month to Freedom, Botlz and Ripley said. Eight months later, Ripley said, the couple had judgments and liens against them and faced the prospect of losing their home under court order to pay off their debts.
The husband called Freedom Debt Relief to report what happened, Ripley said, and the company directed him to a lender that offered the couple a new loan at a 25.18% annual interest rate. The couple would borrow almost $56,000, get a finance charge of more than $42,000, and pay back nearly $98,000 at about $907 per month, the paperwork says.
Instead of taking the deal, the couple contacted Boltz and filed for bankruptcy, Ripley said.
Ripley and Boltz said that if the couple had contacted Boltz in the first place, for a fee of $1,000 to $1,500, Boltz could have arranged for them to go into bankruptcy and get the credit card debts discharged and do it without them facing a tax penalty.
‘A viable alternative’
Freedom did not respond to a media inquiry on Tuesday. It appears it has deferred comment to the American Fair Credit Council. Spokesman Steve Boms said he was responding for this article following inquiries made to the council and to debt-services companies.
House Bill 1067 “would eliminate a critically important tool that thousands of North Carolinians depend on to address their unmanageable unsecured debts,” Bons said. “Debt settlement has proven to be an important solution, and a viable alternative to bankruptcy, for thousands of North Carolinians each year.”
He said that in 2018, debt settlement companies saved North Carolina customers approximately $72 million.
North Carolina Attorney General Josh Stein’s office said the agency has received nearly 300 consumer complaints against debt relief providers since 2011 and it has filed eight enforcement actions against such companies since 2010.
In one of the enforcement actions, approximately 1,400 state consumers paid $8.5 million to the debt-relief provider and less than 13% of their money went to creditors, Stein’s office said.
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