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Illinois Gets Tough on Debt Settlement Companies

Posted on December 6th, 2010 by Kevin Green

Are you or someone you know swamped with debt? If so, you have likely seen or been inundated with advertisements from companies claiming they will work on your behalf to settle your debts (*for a fee, of course). Unfortunately, many of these companies are more interested in collecting money from you than actually helping you settle your debts. Often, these Debt Settlement companies claim they will collect money from you, and once they have accumulated enough money, they will work to settle your debts with your creditors. The companies collect your money and charge fees without working out a settlement. Before long, your creditors sue you, and your Debt Settlement company leaves you to fend for yourself. The fact that you are working with a Debt Settlement company provides no defense to the collection action by the creditors, and the money you have paid the Debt Settlement company is lost.

Illinois recently enacted one of the most stringent laws in the country aimed at protecting consumers from fraudulent Debt Settlement schemes. The Debt Settlement Consumer Protection Act (Public Act 096-1420) regulates Debt Settlement companies doing business in Illinois (businesses that assist debtors for a fee where the primary purpose of the assistance is to obtain a settlement, adjustment or satisfaction of the consumer’s unsecured debt to a creditor). This new law helps ensure that Debt Settlement companies in Illinois engage in legitimate practices for the benefit of consumers.

The new law regulates what a Debt Settlement company must do to operate as well as prescribes certain actions the company must take. Some key provisions require Debt Settlement providers to:

1. Obtain and display a license from the state of Illinois and renew that license annually (§§ 15, 30, 35);
2. File an annual report with the State that includes specified statistical information (§ 33);
3. Keep detailed books and records, including contracts with customers, and furnish these records to the State when requested (§ 55);
4. Permit the State to examine the condition and affairs of the company (§ 60);
5. Separate into trust funds within one business day of receipt all funds received for the purpose of paying bills, invoices, or accounts of the debtor (§ 65);
6. Provide the customer with an itemized accounting at least once per month (§ 65);
7. Credit to the consumer any interest earned by the customer’s trust fund (§ 130);
8. Include a cautionary warning in all advertising and marketing communications (§ 105);
9. Enter into a written contract with the consumer that advises the consumer of material information (§ 120);
10. Permit the consumer to cancel the contract at any time before the services have been fully performed and, within 5 business days of cancellation, refund all funds paid by the consumer that have not been disbursed to creditors along with a full statement of the account (§ 135).

Additionally, before entering a contract with a consumer facing debt, the Debt Settlement company must:

1. Make an individualized financial analysis with the consumer (§ 110);
2. Provide the consumer with a statement containing a good faith estimate of the length of time it will take to complete the debt settlement program, the total amount of debt owed to each creditor, the total savings estimated to complete the debt settlement program, and the monthly targeted savings amount estimated to complete the debt settlement program (§ 110);
3. Provide the consumer with an oral and written disclosure statement as to the risks of debt settlement and the obligations of the debtor (§ 115);
4. Verify with the consumer’s signature that the consumer has been apprised of the risks and his or her rights (§ 115).

The law also prohibits Debt Settlement companies from misleading consumers. For example, a Debt Settlement company may not:

1. Represent any outcomes in its advertising, marketing, or other communications to consumers, expressly or by implication, unless it can substantiate such representations (§ 105);
2. Make any deceptive representations or omissions of material facts, expressly or by implication, in any of its advertising or marketing communications (§ 105).

Additionally, the law strictly regulates the fees a Debt Settlement company may charge. Under the law, a Debt Settlement Company may not:

1. Charge or receive any enrollment fee, set up fee, up front fee of any kind, or any maintenance fee, except for a one-time fee of no more than $50 (§ 125);
2. Charge a settlement fee in excess of 15% of the savings (§ 125);
3. Charge any settlement fee if the amount of the settlement negotiated by the Debt Settlement company is more than the principal amount of the debt (§ 125);
4. Accept any settlement fee until a creditor enters into a legally enforceable agreement (§ 125).

Finally, the law lists other prohibited practices. For instance, a Debt Settlement company may not:

1. Advise or represent (expressly or by implication) that consumers should stop making payments to or communicating with their creditors;
2. Change the mailing address of any of a consumer’s creditor’s statements;
3. Take any power of attorney to confess judgment against the consumer;
4. Appear as the consumer or on behalf of the consumer in any judicial proceedings;
5. Offer or provide gifts or bonuses to consumers for signing a debt settlement service contract or for referring another potential customer.

A Debt Settlement company’s failure to comply with these or any other rules adopted by the State can result in severe penalties. A Debt Settlement company operating without a license is guilty of a Class 4 felony and subject to fines of either $1,000 or four times the amount of consumer debt enrolled, whichever is greater. Additionally, a Debt Settlement company may be fined up to $10,000 per violation for any violation of any provision of the law.

Finally, the law provides civil remedies that permit you, the consumer, to recover damages against a Debt Settlement company that violates key provisions of the law, such as the fee requirements, advertising prohibitions, pre-contract disclosure requirements, and cancellation/refund procedures.

If you have recently utilized a Debt Settlement company and would like to discuss these issues, contact Kevin Green.