Bill to allow debt settlement firms in Ohio gets cautious praise

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A bill to specifically authorize debt settlement companies to operate in Ohio, sponsored by state Sen. Bob Hackett, R-London, got its second hearing on Tuesday before the Senate Financial Institutions and Technology Committee.

Senate Bill 211, introduced in July, would expand the “debt adjusting” definition in current law to include providing services to reduce or eliminate the amount or repayment terms of a debt. That may be through adjusting the interest rate, waiving fees or reducing the principal amount.

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It specifically excludes acting as a debt collector, and prohibits debt settlement firms from sending cease-and-desist letters.

The bill would align Ohio law with federal rules on debt adjusting. For debt settlement firms covered by Hackett’s bill, there would no longer be a cap on fees as there is under current debt adjusting law.

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Steve Boms from the American Fair Credit Council, a trade association of debt settlement companies, testified for the bill. The Federal Reserve says the average Ohio consumer has about $5,000 in credit card debt, typical for the United States, he said. People who have lost income from jobs or incur major medical debt often find bankruptcy their only option, Boms said.

Bankruptcy causes long-term damage to people’s credit, and many applicants don’t qualify anyway, he said.

Credit counseling can give debtors a longer repayment time and better interest rates, but doesn’t reduce the principal owed, Boms said. Debt settlement firms negotiate the base amount of debt with creditors.

Emily White, managing partner with Dann Law’s Columbus office, also testified as a proponent — but said the bill still needs work. She practices consumer law and previously worked for the Legal Aid Society of Cleveland, she said.

White said Hackett’s bill will help by imposing some regulation on an “unscrupulous industry,” but regulations should include standards of conduct, a bonding requirement for the customer money debt settlement firms hold, and a firm cap on total fees.

The industry wants to eliminate the 8.5% fee cap Ohio has on similar services, she said.

Boms said the usual fees for a debt settlement company’s services total 18% to 25% of the original debt. He argued against capping fees in Ohio, saying that competition between firms would be enough to keep fees down.

The Ohio Legislative Service Commission estimates a few dozen debt settlement companies may ultimately operate in Ohio.

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Debt settlement firms are among the few businesses which federal law requires to deliver their services before customers pay fees, Boms said. Most customers see their first accounts settled within 6 months, and can reject any settlement or withdraw from a settlement program at any time without penalty or fee, he said.

The bill would require debt settlement firms to be accredited, register with the secretary of state, and be subject to annual audits, Boms said.

White said the Ohio attorney general has multiple consumer complaints about debt settlement companies that are already operating here.

Consumers need protection from high-pressure sales pitches by debt settlement companies, White said. People who are already stressed and worried about their finances find it hard to pick and choose among purported offers of help, she said.

“People tend to sign up for the one that has called them,” White said.

The average customer of a debt settlement firm owes on seven or eight accounts, with around $30,000 in total debt, Boms said.

“By the time a consumer reaches out to a debt settlement company, they are likely to be delinquent on several debts and they are robbing Peter to pay Paul,” he said.

White said debt settlement firms tell people to stop paying their creditors and instead make payments to the debt settlement company. Thus people go into default on those unpaid debts, risking lawsuits.

Settlement companies don’t begin negotiating with creditors until they’ve collected enough to pay their own fees, White said. But many firms, including credit card companies, won’t work with debt settlement companies at all, she said.

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