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California bill would regulate booming debt settlement industry – Whittier Daily News

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By Erika Paz | CalMatters

Before the pandemic, Graciela Gomez relied on two jobs to keep up with 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 her social media feed promising to lower her debt. After following up, she says what she got was a lawsuit from one of her credit card companies in March. She’s still fighting today.

As California emerges from the pandemic, some residents face crippling personal debt, even as many of the state’s richest residents have seen their wealth grow. Among the economic winners is the booming debt settlement industry, composed largely of online companies that promise to reduce personal debt by negotiating with banks and credit card companies on the customer’s behalf. But consumer advocates point out that these companies often prey on financial desperation and fail to warn customers of the potential consequences — like ending up in court.

Now California lawmakers are considering legislation that would more tightly regulate the industry after largely overlooking personal debt from credit cards and loans in pandemic-era legislation focused on relieving rental and utility debt. The bill is reviving a perennial debate in the Capitol over whether alternative financial services — like payday loans, debt settlement, and credit repair — are financial predators or a needed lifeline for Californians with little or poor credit.

Assemblymember Buffy Wicks, a Democrat from Oakland who authored the bill, contends that existing federal regulations don’t go far enough to protect Californians.

“Let’s make sure that if they are working with these companies, that there’s transparency and empowerment for the consumer 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 her debts, and that she would only need to make one monthly payment to the company until she paid off the balance.

“She made it sound easy, like ‘We’re here to help….Your life is going to change. It’s going to 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 testimony from a satisfied customer, but refused 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 customer has defaulted on their debts — which can sometimes take up to six months — before they begin to negotiate with creditors.

The defaults must occur before the negotiation process can begin, but the debt settlement companies avoid explicitly saying this, Nguyen Orth said. Debt settlement companies like ClearOne Advantage make money by charging customers a percentage of the total debt owed.

In a best-case scenario, willing creditors agree to settle the debt for less than the amount owed. After the customer agrees 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. As part of the program, customers 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 resulting in a judge ordering that the money be taken out of the customer’s bank account or paychecks.

“They come to me when they get sued and they’re like, ‘Why am I being sued? I enrolled in a debt settlement plan. I don’t get it,’” Nguyen Orth said.

She added that most customers don’t realize they can negotiate with creditors themselves. For free.

“I think (debt settlement) is one of the options that need to be there,” said Tomas Gordon, CEO of ClearOne Advantage and president of the Consumer Debt Relief Initiative, a debt settlement industry advocacy organization. “We educate people the right way, and make sure that we self-police the industry to make sure that consumers are getting the best possible outcomes.”

Graciela Gomez stands for a portrait outside of her boyfriend’s home in South Gate, on June 28, 2021. Gomez lost her part-time job due to the pandemic last year, so her debt began to accumulate. Gomez had five credit cards and her part-time job helped her make the monthly credit card payments. Pablo Unzueta for CalMatters

As part of the enrollment process, Gomez provided her income, expenses, and debts to establish a monthly budget. But she said she was left with the impression she could afford to pay a monthly $250 deposit into her settlement fund when she really couldn’t.

The ClearOne Advantage representative also told her that they could not help her if she was not enrolling at least $10,000 in debt, she said — prompting her to enroll in a credit card on which she had been making regular payments so she could participate in the program.

The agreement Gomez signed, which CalMatters reviewed, has no mention of minimum requirements to enroll in the program but does charge a fee assessed at 25% of the total debt. That means the company ultimately plans to charge her just over $2,500. As of June 2021, Gomez deposited $2,259 into her settlement fund, of which $1,053 has been debited as 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 her credit cards and she was now facing a court judgment.

“If I had known since day one that I could have been sued, I think right there, I would have stopped and I would have tried to get more research to try to understand what was the point of paying (ClearOne Advantage),” Gomez said.

What the bill would do

Assembly Bill 1405 wouldn’t change how debt settlement companies work, but it would add more regulation. Existing federal regulation is limited to companies servicing customers across state lines.

The state bill would mimic some of those federal rules, applying them to California-based companies, as well as adding new rules like giving customers a three-day “cooling off period” before the contract takes effect.

The bill is advancing despite almost unanimous opposition from Republicans. Several lobbies have removed their opposition after successfully pushing for amendments, including one that would remove regulations around referral fees, a major source of income for the industry.

But before the most recent amendments, the debt settlement industry had coalesced in opposition to the bill. The Consumer Debt Relief Initiative, composed of members of the debt settlement industry, maintained that new regulations would harm the very consumers that the bill is trying to protect by driving debt settlement companies out of California, leaving consumers with few options.

“Why would any state take away debt settlement as an option to these families during this pandemic?” said Willie Brown, former Assembly Speaker and mayor of San Francisco, in a Consumer Debt Relief Initiative video. “It’s a vital service to those who need it most.”

The alternative for many families, Brown and the industry argue, is bankruptcy or worse.

“You’re left with nothing but bad actors — it creates almost a black market,” said Gordon, the group’s president.

Assemblymember Wicks disagreed.  “For the bad actors, if they feel like they can’t operate in California, then they can go somewhere else,” she said. “And for the good actors, they can stay here and they can help our working families that do need help.”

Gordon said he believes the bill is more about benefiting banks and credit card companies who don’t like having to negotiate customer debts down.

OneMain Financial, the only creditor backing the bill, declined to comment but wrote in a letter of support for the bill that their main goal is to work directly with their customers who default on their debts.

Primed for debt settlement

Despite loan forbearance from the federal CARES Act and a statewide eviction moratorium that aims to protect Californians, personal debt such as credit cards and medical bills have been largely overlooked by lawmakers, leaving consumers exposed to potential predatory practices by alternative financial services.

“That is a huge bubble of people who are primed for debt settlement,” Nguyen Orth said.

The debt settlement industry expects to do very well. In a February meeting of the Consumer Debt Relief Initiative, an Accenture market analysis said that the industry projects a 75% increase in the number of accounts enrolled in debt settlement services in 2021.

The new California Consumer Financial Protection Law, which took effect Jan. 1, gave the state Department of Financial Protection and Innovation new authority to regulate the industry. The 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 did in this case is legal, so it’s unlikely that AB 1405 would have changed much for Gomez. But the bill would address some of the more egregious practices that Nguyen Orth has seen, she said, like promising unrealistic outcomes without advising customers of the possible risks or offering predatory loans that can lead to further debt.

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 outstanding balance. Her advice for others? Avoid debt settlement companies at all costs.

“It’s an absolute 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 directly to who you owe.”

This article is part of The California Divide, a collaboration among newsrooms examining income inequity and economic survival in California.

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Dave says: If you need a cosigner, you're not ready – Northeast Mississippi Daily Journal

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How to improve your credit score in 2021: Easy and effective tips

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If you’ve ever wondered “What is my credit score?” it’s probably time to find out. Having a good credit score can make life a lot more affordable. If you’re about to buy a house or car, for example, the higher your credit score is, the lower your interest rate (and therefore, monthly cost) will probably be.

Your number may also be the deciding factor for whether or not you can get a loan and ultimately determine if you are even able to buy something you want or need.

So, yes, the goal is to have the highest possible credit score you can, but increasing the number doesn’t just happen overnight. There are important steps to take if you want to increase your score, and the sooner you start working on it, the better.

“If you’re trying to increase (your credit score) substantially to accomplish a goal, you’re really going to have to have as much lead time as possible,” said Thomas Nitzsche, director of media and brand at Money Management International, a nonprofit financial counseling and education provider that advises people on how to legally and ethically improve their credit score on their own.

If you have fair credit and you’re trying to improve the number for a house purchase, for instance, you’ll want to start working on it at least a year in advance, he explained to TMRW.

But even though that sounds like a long time away, you can (and should!) start doing things right now to bump that number up. Below, see seven things you should do — and not do — to help improve your credit score:

1. Review your credit report

Review your credit report and look for errors that might be hurting your score. Morsa Images / Getty Images

The first thing you’ll want to do is pull up a copy of your current report so you know where you stand. You can get free reports from all three agencies — TransUnion, Experian, and Equifax — at annualcreditreport.com. Nitzsche said it’s important to take a moment and understand the financial snapshot of where you are today and where you want to be.

You’ll also want to take some time and look for any errors on your report, which could negatively impact your score. “If your name is misspelled, that’s not going to hurt your score,” he explained. “But if you see a late payment or missed payment (that’s in error), or maybe you have an account that should be reporting but isn’t, then that’s a problem and that will impact your score.”

If there is an error, you should dispute it and try to provide as much proof as you can.

One other thing: You can also ask a creditor to remove an issue if it’s been corrected (i.e., if you paid off a collection debt). Nitzsche said it doesn’t hurt to ask and the worst thing they could say is no.

2. Have good financial habits

“The biggest part of your credit score is payment history, so the most critical thing is never missing a due date,” Nitzsche said. Set up a monthly autopay or add all due dates to your calendar so you never miss a bill.

You can also achieve a higher score when you mix different types of accounts on your credit report. It may seem counterintuitive to get extra points for having debt in the form of student loans, mortgages and auto loans, but as long as you’re paying them off responsibly, it shows that you’re reliable.

3. Aim to use 30% or less of your credit at any given time

Know your credit limit and aim to only use 30% or less of it for a better credit score.Tim Robberts / Getty Images

Know your credit card limit, and try not to use any more than 30% of that number each month, otherwise your score could lose points for too much credit utilization.

Another thing you can do is ask your bank to increase your limit. “That will give you more flexibility to spend more,” Nitzsche said. You could also pay it off twice a month to keep the balance low. But he does warn that you never know when the balance is going to be reported to the bureau. It can happen at any point during the month, so it might be the day after you make the payment or the day before. “You don’t necessarily want to use the card and pay it the next day because that doesn’t give the bureau the chance to know that you’re using it,” he said.

4. Avoid requests for new credit

If you’re looking to increase your score around the time you want to buy a house or car, you won’t want to open up a new line of credit, like a retail card, credit card or loan. That’s because “hard” credit inquiries like those can lower your score, and sometimes it comes down to a few points over whether you’re approved or what your rate will be, Nitzsche said.

“Soft” credit inquiries, like when an employer checks your credit or when you pull your own report, won’t affect your score.

5. Keep all accounts open, even ones you don’t use anymore

Even if you don’t use that credit card from college, it’s a good idea to just keep it open because closing it could hurt your score. Nitzsche explained that you’ll be dinged some points for each account that is closed. If you want or need to mentally break up with a card, just cut it up instead.

6. Build your credit if needed

If you haven’t established credit yet, you might not even exist … in the credit report space, that is! “If someone has never fallen in delinquency on any subscriptions or utilities or never had collections on anything and they have not utilized credit cards or loans in the past seven to 10 years, they may not have a credit profile at all,” Nitzsche said. “That presents a challenge when you want to buy a home.”

If this sounds familiar, you may have to get a secured credit card where you put down a deposit, he advised. “You still have to make payments and use it responsibly. Not all banks offer them but you can usually check with your local bank or credit union.”

7. Reach out for help

If you want personal guidance on boosting your credit score, make an appointment with a credit counselor.kate_sept2004 / Getty Images

There are many apps and credit-monitoring services that can help you stay on top of your credit score. You could also reach out to a professional credit counselor who can help you navigate your specific situation. (Here’s a good resource about finding a reputable service.)

One last thing: Nitzsche warned that everyone should beware of credit repair scams that claim to be able to increase credit scores for an advance fee to get accurate negative information removed (even temporarily) from credit reports.

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