Bill would permit for-profit debt firms

It is unclear when the bill might clear the Ways and Means Committee and come to the full Senate. But the House sponsor, Representative Michael Costello, said there is a high likelihood that the bill will pass before the Legislature adjourns at the end of this month.

Were not concerned if a company is for-profit or nonprofit, said Costello, a Newburyport Democrat. What were saying is, lsquo;Anyone can enter this business but you will be highly regulated in Massachusetts.

Debt-relief counseling services aim to help financially strapped consumers reduce and manage their bills, acting as an intermediary between debtors and creditors. They typically work out a repayment plan that might include the waiving of penalty fees, the reduction of interest, or both, and collect monthly payments from consumers, which they pass on to the creditors.

On average, nonprofit servicers charge a fee of $26 per month; for-profit firms can charge as much as 18 percent of outstanding debt, according to federal reports.

For-profit firms have come under scrutiny for collecting these fees but too-often doing little to help debt-ridden consumers. A decade ago, the Federal Trade Commission found that for-profit firms, some masquerading as nonprofits, imposed undisclosed fees, made unrealistic promises about reducing debt and interest, and failed to pay creditors with money collected from their clients.

In 2010, with complaints about for-profit debt relief companies on the rise again, the FTC prohibited for-profit debt companies from taking money from consumers before providing significant help.

The Massachusetts ban on for-profit debt counseling companies kept them out of the state for decades. But in recent years, the firms have exploited a loophole in the law through affiliates that call themselves debt settlement rather than debt counseling firms.

Instead of collecting payments directly from consumers and passing them onto creditors, debt settlers advise consumers to stop all payments and put that money in a bank account.

The companies claim they then will persuade creditors to accept smaller, lump-sum settlements that will come out of the bank account, from which the debt firms also take fees of as much as 18 percent or more. Consumers often end up worse than before, critics says, owing more money, having less, and facing lawsuits from creditors.

Three years ago, New York Citys Department of Consumer Affairs named debt settlement Top Fraud of the Year.

Bob Linderman, a spokesman for the American Fair Credit Council, a trade group of the for-profit debt relief industry, said there are many reputable for-profit credit counseling and debt settlement firms that help consumers. He said the Massachusetts legislation would rein in bad practices by debt settlement firms.

But consumer advocates hope for a simpler approach: banning debt settlement firms from the state as well. In virtually every circumstance there is no benefit whatsoever to consumers, said Stuart Rossman, director of litigation for the National Consumer Law Center, a Boston based-advocacy group.

Four years ago, Attorney General Martha Coakley and 19 other state attorneys general won a settlement against a Maryland for-profit debt firm, alleging that it misled consumers by presenting itself as a nonprofit and charged them without providing any benefits.

Coakleys spokesman, Brad Puffer, declined to comment on whether Coakley supported the legislation. Instead, he said that any changes to the law should require strict licensing standards and regulatory oversight.

The New England Center for Investigative Reporting is a nonprofit newsroom based at Boston University and the studios of WGBH radio and TV. Kathleen Day can be reached at [email protected]; Jenifer McKim can be reached at [email protected].