Open Letter to Members of the Pennsylvania Senate (re: Debt-Settlement, SB 622)

Dear Representative:

As Pennsylvania members of the National Association of Consumer Bankruptcy Attorneys (NACBA), we write to express deep concern regarding SB 622, as this legislation would allow debt settlement companies to prey on the most debt-burdened consumers in our state.    

Although debt settlement companies market their services as relief, such programs rarely work as promised and involve an inherently problematic business model. SB 622 would eliminate existing protections, while increasing the following harmful debt settlement practices:

  • Debt-settlement schemes encourage consumers to default on their debts.[1]  Because creditors frequently will not negotiate reduced balances with consumers who are still current on their bills, debt settlement companies often instruct their clients to stop making monthly payments, explaining that they will negotiate a settlement with funds the client has paid in lieu of their monthly debt repayments. Once the client defaults, he or she faces fines, penalties, higher interest rates, and are subjected to increasingly aggressive debt-collection efforts including litigation and wage garnishment. Consequently, consumers often find themselves worse off than when the process of debt settlement began: They are deeper in debt, with their credit scores severely harmed.
  • Debt settlement often makes a bad problem even worse. When a consumer defaults on his or her debt, the overall debt burden can rise quickly. As accumulating penalties and interest charges inflate the consumer’s debt-load, creditors begin collection efforts and many eventually sue. This is why debt settlement is always a gamble: If any of the creditors refuse to settle, the consumer is left worse off than when they started.
  • Even “successful” debt settlements can come with a high price. The few consumers who are successful in debt settlement may find themselves with another unexpected bill: tax liability. Depending on the consumer’s financial condition, the amount of savings realized from debt settlement can be considered taxable income. Credit card companies and other creditors may report a debt reduction to the IRS. Unless the consumer is considered insolvent, the IRS considers it income and the consumer will be on the hook to pay taxes on it.
  • The problem is not limited to “bad actors” since the debt-settlement approach itself is flawed. Debt settlement schemes are a trap for most consumers because inherent in the industry’s standard business model is the requirement that clients breach their contractual obligations with creditors.
  • Many creditors refuse to work with debt settlers. The knowledge of which creditors do or do not is not known by the consumer at the time of the debt settlement contract.[2]  Once defaulted per the debt settlement company’s instructions, consumers face accelerated collection attempts by these creditors. According to the debt settlement industry, lawsuits from creditors are a critical reason why customers become unable to complete the debt settlement program.[3]

Here is one example:
Bankruptcy attorney Cynthia Reed, a NACBA member from Lancaster, Pennsylvania said: “In my 14 years of practicing bankruptcy law in Pennsylvania, I estimate nearly 1 in 3 of my clients present with a debt-settlement experience. Many of these clients come in for an initial bankruptcy consultation after having attempted debt settlement, the client’s story usually starts like this: “Well, I was trying to pay my debts and I signed up with this company . . .” (here the client usually names the company that he/she was using such as Liberty Debt Choice or Freedom Financial Network; the client then goes on to relate how he/she paid hundreds, and in some cases thousands to the settlement company with modest or no results.

During the time that the client is paying the debt settlement company, the client is not paying the creditors, and they are getting harassed by the creditors and the collectors; their credit goes completely in the tank and, in some cases, I’ve had clients who now were being sued. So they come to me, figuring that a bankruptcy is their only option and, by that time, it really IS their only option. I’ve seen people who were paying $800, $900 and more per month with nothing happening. They can’t reach anyone at the debt settlement provider’s office or if they do they’re told they just have to be patient and keep making their payments. So, for a while they do. And still nothing happens. Finally, they come to see me about a bankruptcy. This has become increasingly the case in the past 5 or 6 years, even after the FTC rules banning advance fees.

It’s heartbreaking, because so many people think they’re doing the right thing by trying to pay SOMETHING, and they feel good that they’re getting a handle on their finances, until they realize that they’re deeper in the hole than before. The whole concept of “debt settlement,” at least as it is practiced right now, does little more than hold out false hope to desperate people.


In response to claims made by debt settlement companies regarding bankruptcy and about the effects of the recent changes to the FTC’s (Federal Trade Commission) rules that prohibit charging advance fees, we wish to note the following points:

  • Debt settlement is not a safe alternative to bankruptcy. Many debt settlement clients end up filing for bankruptcy anyway, after debt settlement fails.  Additionally, debt settlement does not provide the same protection to creditors or consumers which bankruptcy provides.  For example, similar to Chapter 13 bankruptcy, debt settlement attempts to settle debts at a reduced rate—except there is no court-approval, no assurance of fairness to other creditors, and no right for creditors to be heard.  Additionally, bankruptcy prevents the cascade of creditor lawsuits that is common in debt settlement since consumers in bankruptcy are protected by a statutorily mandated automatic stay of other lawsuits.
  • Debt settlement is not a safe alternative to legal representation regarding defenses and rights against creditors.  Debt settlement programs often suggest that consumers should use the Fair Debt Collection Practices Act (“FDCPA”), the Fair Credit Reporting Act (“FCRA”) and the Unfair Trade Practices and Consumer Protection Laws, to forestall collection and build counterclaims against creditors. Many even provide forms for consumers to use to this effect. However, the use of these laws often becomes fraudulent and abusive. Further, debt settlement programs are unable to advise consumers whether debts are legally collectible for reasons including the Statute of Limitations, identity theft, or other deficiencies, instead settling claims that the consumer may have no obligation to pay.
  • While the FTC Rule effectively addressed some abuses, it has not resolved all of them.   Since debt settlement programs can take three years or longer to complete and only three years have passed since this rule change took effect, it is unknown whether the advance fee ban will result in better success rates.  Debt settlement companies have not yet publicly released completion rates, or even partial completion rates, of consumers enrolled over this period.  Moreover, recent data from Colorado’s Attorney General reveal little change in that state upon implementation of the advance fee ban.[4]
  • Debt settlement programs routinely provide legal advice.  Whether provided online, in brochures, or through television and radio advertising, materials from debt settlement programs routinely provide consumers with information regarding their rights under a variety of state and federal laws, including bankruptcy, the FDCPA,  FCRA and the Unfair Trade Practices and Consumer Protection Laws. This information is often misleading or inaccurate (skewing against consumers seeking forms of assistance other than debt settlement), although even when this advice is accurate, it can constitute the unauthorized practice of law. Further, it is difficult to understand how a debt settlement program can adequately advise consumers regarding their rights and options under state and federal law, including defenses to invalid debts, debts barred from collection under the Statute of Limitation, bankruptcy options, etc., without illegally giving legal advice. SB 622 frees debt settlement programs from oversight by the Pennsylvania Bar and allows non-attorneys to dispense often inaccurate legal advice, without the client protections under which the fully regulated and supervised legal community provides.

There is growing consensus that debt settlement is a problematic manner of providing debt relief.  For example, The Better Business Bureau has designated debt settlement as an “inherently problematic business.”[5]  Similarly, the New York City Department of Consumer Affairs called debt settlement “the single greatest consumer fraud of the year.”6 SB 622 is troubling because it creates financial incentives for companies to encourage consumers to stop paying their debts, allows for unlimited fees regardless of whether any savings are actually achieved, provides no standards to ensure that debt settlement is suitable for a particular consumer, and does nothing to ensure the consumer will not be worse off in light of the practices authorized by the bill.

For these reasons, we urge you to oppose SB 622.  

Thank you for your consideration of these concerns. Please let us know if we can provide any additional information.

Henry Sommer
NACBA President Emeritus
Philadelphia, Pennsylvania


[1]The General Accountability Office investigated abuses in the debt settlement industry using “mystery shoppers,” who called debt settlement companies posing clients.  The GAO reported, “Representatives of nearly all the companies we called—17 out of 20—advised us to stop paying our creditors,”  These included 5 members of The Association of Settlement Companies (now doing business as American Fair Credit Council)—purportedly representing the “better” debt settlement companies.  Debt Settlement: Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers, U.S. Gov’t Accountability Office Rep. No. GAO-10-593T (Apr. 22, 2010) at 9 [hereinafter U.S. GAO Report], available at

[2] Inside ARM Debt Settlement Survey: How Creditors and Collectors Utilize the Debt Settlement Industry to Increase Collections, INSIDEARM.COM (Jan. 2013) (finding that only one-half of collectors (including credit card companies, debt collectors and debt buyers) were willing to engage with debt settlement companies).

[3] “One of the most critical factors in keeping consumers in debt settlement programs is the willingness of the consumer’s creditors to forebear from pursuing collections efforts through lawsuits,” according to Freedom Debt Relief and AFCC.  See AFCC is “American Fair Credit Council,” the industry trade association formerly known as TASC.  April 28, 2010 letter from Robert Linderman, General Counsel of Freedom Debt Relief and Vice Chairman of the Board of The Association of Debt Settlement Companies (now doing business as American Fair Credit Council), to David C. Vladeck, Director, Federal Trade Commission Bureau of Consumer Protection, at 5 n. 9 (emphasis supplied).

[4] Data from Colorado show that nearly 55% of consumers who enrolled after the advance fee ban had already terminated from the program (thereby not succeeding) within the first two years (industry claims that programs last 3-4 years).

[5] The Better Business Bureau provided data to State attorneys general showing that since 2007, debt settlement and debt negotiation companies have annually generated the most complaints received by the Bureau. See Comments of the National Association of Attorneys General to Federal Trade Commission re Telemarketing Sales Rule – Debt Relief Amendments, Matter No. R411001 at n.5 and text (Oct. 23, 2009, available at

6 See “Department of Consumer Affairs Declares Debt Settlement Top Fraud of the Year”, available at

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