Settling For Less: The Dangers Of Debt Settlement

By: Stephanie Diffin Email
By: Stephanie Diffin Email

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November 24, 2010

You've probably seen the ads on TV, online, even in the phone book. They all say basically the same thing, that they'll settle your debt for less than what you owe.

"If it sounds too good to be true, it isn't true," said Kansas Deputy Bank Commissioner Kevin Glendening.

That's why the state is trying to keep debt settlement companies out of Kansas. But the problem, isn't a small one.

"Many people are in some state of financial distress, and that of course is fertile ground for these types of companies to try to operate," said Glendening.

Thomas Vega knows all about financial distress.

"I was an engineer, I was making good money, and I had gotten myself into this huge debt. And the first thing you do is you panic," said Vega.

Panic, after one credit card turned into many, and the payments became too much to bear. That's when Vega went to a third party for help, and not to settle his debt, but to manage it.

"The panic factor was taken away, and with the panic factor taken away, then I could think and do a little bit more planning," said Vega.

Now, Vega is debt-free with substantial savings, thanks to the help of a debt management company, like the one Jeff Witherspoon runs in downtown Wichita, called Consumer Credit Counseling Service.

"I don't own this business, we're not a for profit entity, we're owned by the community. And so it's our job to help this community the best that we can," said Witherspoon.

Witherspoon's organization provides free financial counseling and classes. It also manages debt payments, charging no more than $20 per month. It's one of the only 31 credit service organizations the state of Kansas has licensed and closely regulates.

"We've gone through an IRS audit and passed that, we've gone through a state audit, passed that as well," said Witherspoon.

That's just one thing setting CCCS apart from companies the state is trying to stop. Instead of helping manage payments, debt settlement companies collect money from a consumer, taking a sometimes large portion for themselves. Then, they hold that money until they feel there's enough to offer a creditor a settlement, which the state says is basically an upfront, low-end offer to clear the debt.

"The creditors aren't getting any money, the cash that you have available is going to somebody else. That can only put you in a worse situation than what you were before you started," said Glendening.

Many times, the situation leads to court, as creditors file lawsuits when they stop receiving payments. There's also no guarantee creditors will agree to settlement. These problems often end in bankruptcy.

"What I see is just, clients are at their wits end. So they're beyond being angry. I think by the time I see them they're just frustrated and say, 'I just need help,'" said bankruptcy attorney Dana Milby.

The State Bank Commissioner's office says that's why it's taken action against nearly 130 debt settlement companies, gathering more than $2 million dollars in retribution for about 6,000 Kansans. It currently has a nearly $8.5 million lawsuit pending against Persels and Associates.

KAKE News spoke to a managing partner at Persels and Associates who says the organization is not a debt settlement company, but rather, a law firm. He also responded to the state's cease and desist order which alleges, among other things, that the company delayed payment of consumers' debt.

"That is nonsense. We don't delay payments to creditors, we make it very clear to our clients that it takes time to negotiate these compromises," said Persels and Associates Managing Partner Neil Ruther.

"There's always somebody thinking up a new plan to separate somebody from their money," said Glendening.

But the state says it's continuing to try and return that money, while getting the word out to be careful who you trust.

"The key is finding someone who will actually help you and not further damage your position," said Glendening.

And Vega says he's thankful he found just that.

"[It] Feels wonderful, feels wonderful. I recommend it for everybody. Debt is a lousy way to live," said Vega.

The state says you should check with the Bank Commissioner's office or the Better Business Bureau before giving any organization money to help your financial situation. It even suggests taking that precaution with organizations that have been licensed, as their practices are also constantly under the state's supervision.

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