Regulation of Debt Settlement Companies

            In 2008 and 2009, a number of mortgage counseling companies caused the foreclosure crisis to deepen.  These companies, mostly serving the Latino Community in Chicago, were found to be fraudulent.  They were making promises and taking the consumer’s money to help them modify their loan agreements, then doing nothing to help their customers.  In response to these scams, Illinois Attorney General Lisa Madigan filed suit against every mortgage solution company reported to be engaged in fraudulent practices.

Now Lisa Madigan is cracking down on fraudulent debt settlement firms who take consumer’s money to settle their debts and don’t follow through on their promises. 

Currently on the books are laws that require a debt settlement company in Illinois to be licensed, limit their initial counseling fee to $50 per debtor, limit their sign up fee to $50 per month, and provide a regular and complete accounting of any money held in a trust fund account.

Soon, however, new legislation will be put into place that will make it even harder for a for-profit debt settlement company to scam consumers.  Among the new laws the Illinois government will be putting into place, Illinois debt settlement companies will have to post a bond with the government. 

The best part of the new laws for consumers is the cap Illinois will be putting on the amount debt settlement companies will be allowed to charge as a success fee.  Success fees are charged by most debt settlement companies based on the amount saved by the consumer because of the settlement.  Any debt settlement company doing business with an Illinois consumer will not be able to charge more than 15% of the debt. 

Finally, a debt settlement company will no longer be able to promise their consumers that they will be able to “settle their debts for pennies on the dollar” or advise their Illinois clients to stop paying their debts to save for a lump sum settlement. 

Both of these provisions stem directly from the foreclosure assistance scandals that rocked Chicago last year.  Many consumers were advised by foreclosure assistance companies to stop paying their mortgage because they were told their lenders would only speak to them if they were behind on their payments.  This led a lot, if not all, of those people ending up in foreclosure when they had the resources to make their mortgage payments at the time they enrolled with the assistance company, even though making their payments were becoming difficult.