By Erika Paz | Cal Matters
Before the pandemic, Graciela Gomez relied on two jobs to meet her expenses. After losing her part-time job at Macy’s in March 2020, she had to choose between paying off her credit cards or paying her rent. She chose the latter.
“I didn’t know who to talk to, who to contact. I was embarrassed,” Gomez said.
An ad for a debt settlement company appeared on his social media feed promising to reduce his debt. After following up, she says she got a lawsuit from one of her credit card companies in March. She still fights today.
As California emerges from the pandemic, some residents coping with crushing personal debt, even as many of the state’s wealthiest residents have seen their wealth increase. Among the economic winners is the booming debt settlement industry, made up largely of online companies that promise to reduce personal debt by negotiating with banks and credit card companies on behalf of the customer. But consumer advocates point out that these companies often prey on financial desperation and fail to warn customers of potential consequences, such as ending up in court.
Now California lawmakers are considering legislation that would more tightly regulate the industry after largely neglecting personal debt from credit cards and online loans. pandemic-era legislation focused on rental and utility debt relief. The law project reignites an everlasting debate on Capitol Hill over whether alternative financial services — like payday loans, debt settlement, and credit repair — are financial predators or a necessary lifeline for Californians with little or no credit.
Assemblywoman Buffy Wicks, an Oakland Democrat who drafted the bill, argues that existing federal regulations don’t go far enough to protect Californians.
“Let’s make sure that if they’re working with these companies, there’s transparency and consumer accountability in that process,” Wicks said.
How debt settlement works
After Gomez’s first phone call with ClearOne Advantage, the debt settlement company, she said she was under the impression that the company would pay off all of her debts and she would only have to make one monthly payment. to the company until it pays off the balance.
“She made it sound easy, like, ‘We’re here to help you… Your life is going to change. It will be so much easier. And I believed it,” Gomez said.
ClearOne Advantage declined to comment on Gomez’s experience. The company provided what it said was a testimonial from a satisfied customer, but declined to provide contact information so CalMatters could interview the customer.
Desiree Nguyen Orth, director of the Consumer Justice Clinic at the East Bay Community Law Center, explained how most debt settlement companies work.
Customers who enroll in a debt settlement plan make a monthly payment to a debt settlement fund. According to Nguyen Orth, debt settlement companies wait until the client is in default – which can sometimes take up to six months – before starting to negotiate with creditors.
Defaults have to happen before the negotiation process can begin, but debt settlement companies avoid saying so explicitly, Nguyen Orth said. Debt settlement companies like ClearOne Advantage make money by charging customers a percentage of the total debt owed.
In the best-case scenario, willing creditors agree to settle the debt for less than the amount owed. Once the client has agreed to the new terms, the debt settlement fund will be used to pay the debt.
The outcome is worse if a creditor refuses to work with the debt settlement company. Under the program, clients sign a cease and desist letter that prohibits creditors from contacting them directly. In an effort to collect the debt, creditors will sue customers, often culminating in a judge ordering that the money be withdrawn from the customer’s bank account or paychecks.
“They come to me when they’re being sued and they’re like, ‘Why am I being sued? I signed up for a debt settlement plan. I don’t understand,'” Nguyen Orth said.
She added that most clients don’t realize they can negotiate with creditors on their own. Free.
“I think (debt settlement) is one of the options that needs to exist,” said Tomas Gordon, CEO of ClearOne Advantage and president of the Consumer Debt Relief Initiative, a settlement industry advocacy organization. debt. “We educate people the right way and make sure we monitor the industry to make sure consumers get the best possible results.”
As part of the sign-up process, Gomez provided her income, expenses, and debts to come up with a monthly budget. But she said she felt like she could afford to put a $250 monthly deposit into her settlement fund when she really couldn’t.
The ClearOne Advantage rep also told her they couldn’t help her if she didn’t list at least $10,000 in debt, she said, prompting her to sign up for a credit card on which she made regular payments so that she could participate in the program. .
The agreement Gomez signed, which CalMatters reviewed, makes no mention of minimum requirements to enroll in the program, but charges a fee assessed at 25% of total debt. This means that the company ultimately plans to charge him just over $2,500. In June 2021, Gomez deposited $2,259 into his settlement fund, of which $1,053 was debited in service and transaction fees.
It wasn’t until Gomez was sued by Bank of America, she said, that she learned she had defaulted on all of her credit cards and was now facing court judgment. court.
“If I had known from day one that I could have been sued, I think by then I would have stopped and tried to get more research to try to figure out what the point of paying was (ClearOne Advantage )”, Gomez mentioned.
What the bill would do
Assembly Bill 1405 would not change how debt settlement companies operate, but it would add more regulation. Existing federal regulations are limited to businesses serving customers across state lines.
The state bill would mimic some of those federal rules, applying them to California-based businesses, as well as adding new rules like giving customers a three-day “cooling-off period” before the contract ends. comes into force.
The bill advances despite near-unanimous opposition from Republicans. Several lobbies withdrew their opposition after successfully pushing for amendments, including one that would scrap regulations on referral fees, a major source of revenue for the industry.
But before the most recent amendments, the debt settlement industry had banded together to oppose the bill. The Consumer Debt Relief Initiative, made up of members of the debt settlement industry, argued that new regulations would hurt the very consumers the bill is trying to protect by driving debt settlement companies out of California, leaving consumers few options.
“Why would any state remove debt settlement as an option for these families during this pandemic?” said Willie Brown, former Speaker of the Assembly and mayor of San Francisco, in a Consumer Debt Relief Initiative Video. “It’s a vital service for those who need it most.”
The alternative for many families, Brown and the industry argue, is bankruptcy or worse.
“You’re left with just bad actors – it almost creates a black market,” said Gordon, the group’s chairman.
Assemblyman Wicks disagreed. “For bad actors, if they feel like they can’t operate in California, they can go somewhere else,” she said. “And for good actors, they can stay here and they can help our working families who need help.”
Gordon said he thinks the bill is more about benefiting banks and credit card companies who don’t like having to negotiate customer debts.
OneMain Financial, the only creditor supporting the bill, declined to comment but wrote in a support letter for the invoice that their main objective is to work directly with their customers who are not meeting their debts.
Primed for debt settlement
Despite the federal CARES Act loan forbearance and a statewide eviction moratorium that aims to protect Californians, personal debt such as credit cards and medical bills have been largely ignored by lawmakers, leaving consumers exposed to potential predatory practices by alternative financial services.
“It’s a huge bubble of people who are ready for debt settlement,” Nguyen Orth said.
The debt settlement industry expects to do very well. At a meeting in February of consumer debt relief initiative, market analysis from Accenture indicates that the industry expects a 75% increase in the number of accounts enrolled in debt settlement services in 2021.
California’s new Consumer Financial Protection Act, which took effect Jan. 1, gave the state Department of Financial Protection and Innovation new authority to regulate the industry. Agency says it won’t start tracking debt settlement companies until 2023.
Does the bill go far enough?
According to Nguyen Orth, everything ClearOne Advantage has done in this case is legal, so AB 1405 is unlikely to have changed much for Gomez. But the bill would address some of the most blatant practices which Nguyen Orth saw, she said, as promising unrealistic results without informing clients of the possible risks or offering predatory loans that can lead to further indebtedness.
Gomez ended her contract with ClearOne Advantage at the end of June, but she is still working with Bank of America to settle the lawsuit and the outstanding balance. His advice to others? Avoid debt settlement companies at all costs.
“It’s a real scam. They prey on people like me,” Gomez said. “Call the credit cards or collection agencies yourself…It’s easier and the money will go straight to whoever you owe.”
This article is part of The California Dividea collaboration between newsrooms examining income inequality and economic survival in California.