Richard Nemeth, Esq. Nemeth & Associates, LLC 526 Superior Ave., East Suite 1120 Cleveland, OH / rnemeth@ohbklaw.

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1 Richard Nemeth, Esq. Nemeth & Associates, LLC 526 Superior Ave., East Suite 1120 Cleveland, OH / To: Honorable Jim Hughes, Chairman Senate Financial Institutions Committee Statement in Opposition to Senate Bill No. 226 Thank you Chairman Hughes and members of the Committee for giving me the opportunity to address you with respect to this important issue. My name is Richard Nemeth and I am a bankruptcy attorney in Cleveland, Ohio, where the focus of my practice for the last 30 years has been representing individuals, families and small businesses that file for bankruptcy. I am also a state chair for the National Association of Consumer Bankruptcy Attorneys [ NACBA ]. NACBA has serious concerns about Ohio adopting any legislation that would enable the debt settlement industry to operate without substantial consumer protections, including caps on the fees that can be charged. NACBA issued a consumer alert not long ago warning consumers about the current practices of this industry and the effort of the industry to have states pass legislation that would make it easier, and more profitable, for the industry to operate. Here is an excerpt from the alert: Already struggling with home foreclosures, harsh bank and credit card fees, and other major financial challenges, America s most deeply indebted consumers are now falling victim to a major new threat: so-called debt settlement schemes that promise to make clients debt free in a relatively short period of time. Unfortunately, most consumers who pursue

2 debt settlement services find themselves facing not relief but even steeper financial losses. Even the industry acknowledges though not in its ever-present radio and online advertising that debt settlement schemes fail to work for about two thirds of clients. Federal and state officials put the debt-settlement success rate even lower at about one in 10 cases meaning that the vast majority of unwary and uninformed consumers end up with more red ink, not the promised debt-free outcome. There is now widespread documentation of the danger that debt settlement schemes pose to consumers. The Better Business Bureau has designated debt settlement as an inherently problematic business. Similarly, the New York City Department of Consumer Affairs called debt settlement the single greatest consumer fraud of the year. Across the country, the U.S. Government Accountability Office (GAO), the Federal Trade Commission (FTC), 41 state attorneys general, consumer and legal services entities, and consumer bankruptcy attorneys have all uncovered substantial evidence of abuses by a wide range of debt settlement companies. We think it is a grave mistake for Ohio to adopt a regulatory scheme for the debt settlement industry that does not mandate specific fee caps similar to those currently in the law, which would be eliminated by the proposed legislation. To do so would enable an industry that, even under the current regulatory scheme is a risk to consumers and, by its own admission, unsuccessful in providing meaningful debt relief in the vast majority of cases. I would like to respond some of the points made in the proponent testimony submitted to you by the American Fair Credit Counsel [ The AFCC ] on November 17, Current FTC rules are not adequate to protect Ohioans against the abuses of this industry. 2

3 In its testimony, the AFCC states that the FTC has issued provisions that provide strong consumer protection, and that, SB 226 would make it clear in Ohio that FTC rules apply in addition to protections under Ohio law so that anyone trying to operate in the current gray area would be unable to charge advance fee [sic]. The reality is that members of this industry charge illegal fees despite the FTC rules. In August, 2014, the Consumer Finance Protection Bureau [ CFPB ] initiated enforcement actions against a payment processor which was processing illegal payments from hundreds of debt settlement companies: According to the CFPB s complaint, since October 2010, Global Client Solutions processed tens of millions of dollars in illegal advance fees from tens of thousands of consumers. Global Client Solutions processed these unlawful fees on behalf of hundreds of debt relief companies across the country. [Emphasis added]. [ It is respectfully submitted that it would bad policy to enact any law that relaxes regulatory control of an industry where hundreds of companies flaunt current FTC regulations at the expense of consumers. 2. Debt settlement is not more effective than alternatives. The AFCC cites misleading data to support its claim that debt settlement is effective when compared to bankruptcy and credit counseling. It states that completion rates for AFCC members were approximately 34.5% - 40%, citing its own, unsubstantiated comment letter to the FTC in October, AFCC claims that this compares favorably to non-profit credit counseling services which have an approximate 1 One can only guess what AFCC means by the term completion rates and why the only data it could put forth is not only an estimate, but also a range. 3

4 success rate of 21 26%, and chapter 13 bankruptcy in which the national completion rate for confirmed chapter 13 repayment plans is 33%. As a 30 year bankruptcy practitioner, I can tell you that most chapter 13 plans fail because of an employment income interruption or reduction which results in the inability to fund the repayment plan. The most common result in these cases is conversion to chapter 7 which involves the immediate cancellation of debt. This is hardly a failure to obtain debt relief. Success with regard to non-profit credit counseling agencies refers to the number of participants that are able to resolve their debt issues entirely. However, completion of debt settlement does not necessarily mean that all debts are settled. The CFPB issued a warning to consumers about this problem in April, 2014: The debt settlement industry is relatively new. There are several different business models, and not all of them may operate in your best interest or even legally under state or federal law. A 2010, US Government Accountability Office report has found that some debt settlement companies engage in fraudulent, deceptive, or abusive practices that pose risk to consumers. It also found that most of the time, debt settlement companies do not eliminate all or most of the client s debt. This creates problems for their clients, because the unsettled debts grow larger through late fees, penalty interest and other charges. Also, debt settlement often prompts creditors to speed up collection efforts. [Emphasis added]. [ 3. The myth that this bill would create jobs in Ohio and create additional tax revenue. In its Summary of Content, the AFCC includes a statement that HB 173 [sic] would create jobs in Ohio and create additional tax revenue. This is patently untrue, and AFCC apparently removed this argument from its written testimony because it doesn t 4

5 exist. Because of Ohio s current fee cap regulation, debt settlement companies operate from outside of Ohio and will likely do so in the future. No significant jobs or tax revenue will be created. 4. The debt settlement industry is notoriously problematic. AFCC attempts to make the case that debt settlement companies are safe and effective after the enactment of the 2010 FTC regulations. The CFPB disagrees. This is what the CFPB had to say about the industry in June, 2014: Warning: Dealing with debt settlement companies can be risky. Some debt settlement companies promise more than they can deliver. Some of your creditors may also refuse to work with the debt settlement company you choose. In many cases, the debt settlement company will be unable to settle all of your debts. Debt settlement companies often claim they can negotiate with your creditors to reduce the amount you owe. However, before working with a debt settlement company, you should remember: Debt settlement companies often charge expensive fees. Debt settlement companies typically encourage you to stop paying your credit card bills. If you stop paying your bills, you will incur late fees, penalty interest and other charges, and creditors will likely step up their collection efforts against you. Unless the debt settlement company settles all or most of your debts, the built up penalties and fees on the unsettled debts may wipe out any savings the debt settlement company achieves on the debts it settles. Using debt settlement services can have a negative impact on your credit score and your ability to get credit in the future. Warning: There could be tax consequences for debt forgiveness. If a portion of your debt is forgiven by the creditor, it could be counted as taxable income on your federal income taxes. You may want to consult a tax advisor or tax attorney to learn how forgiven debt affects your federal income tax. Warning: Debt settlement may well leave you deeper in debt than you were when you started. Most debt settlement companies will ask you to stop paying your debts in order to get creditors to negotiate and to collect the funds required for a settlement. This can have a negative effect on your credit score and may result in the creditor or debt collector filing a lawsuit 5

6 while you are collecting settlement funds. And if you stop making payments on a credit card, late fees and interest will be added to the debt each month. If you exceed your credit limit, additional fees and charges may apply. This can cause your original debt to increase. Tip: Avoid doing business with any company that promises to settle your debt if the company: Charges any fees before it settles your debts Touts a "new government program" to bail out personal credit card debt Guarantees it can make your debt go away Tells you to stop communicating with your creditors Tells you it can stop debt collection calls and lawsuits Guarantees that your unsecured debts can be paid off If you do business with a for-profit debt relief company, the company may tell you to put money in a dedicated bank account, which will be managed by a third party. You may be charged fees for using this account. [ And in October, 2015, it added this: Warning: Many debt settlement companies will instruct you to stop making payments to your creditors. If you stop making payments, you may face collection efforts, late fees and penalty interest charges. These fees and charges will cause your debts to grow larger. In this way, debt settlement may cause your total debt-load to grow, even if the debt settlement company settles one or more of your debts. If you stop paying your debts, your creditors will likely begin collection efforts and will start charging you penalty fees and interest. Debt settlement companies say that law suits and debt collection efforts are key factors preventing clients from successfully completing a debt settlement program. While some creditors and debt collectors will agree to settlements with debt settlement companies, many will not negotiate how much they will settle for. Instead, they will have standard policies about how much principal they will forgive when you haven't made payments for a certain period of time. This means debt settlement companies usually can't get better terms than you could get by talking to your creditors yourself. Warning: Some creditors and debt collectors will not negotiate with debt settlement companies at all. Once they learn you are working with a debt 6

7 settlement firm, their collection efforts may become more intense. For example, the collector may file a lawsuit against you. In most circumstances, neither credit counselors nor debt settlement companies can erase all of your debts. Tip: If you simply don't have enough income to pay what you owe, you may consider filing for bankruptcy. Filing for bankruptcy can have long term consequences so consult a bankruptcy attorney to learn whether bankruptcy is a good solution for you. [ 7