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California Moves to Regulate Booming Debt Settlement Industry

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Prior to the pandemic, Graciella Gomez relied on two jobs to keep up with her costs. After losing her part-time job at Macy’s in March 2020, she had to choose between paying a credit card and paying rent. She chose the latter.

“I didn’t know who to talk to and who to contact. It was embarrassing,” Gomez said.

An ad for a debt settlement company appeared in her social media feed, promising to reduce her debt. After following up, she says it was a proceeding from one of her credit card companies in March. She is still fighting today.

“I didn’t know who to talk to and who to contact. It was embarrassing.”

As California emerges from the pandemic, some inhabitants Face catastrophic personal debtEven if many of the state’s wealthiest inhabitants see their wealth grow. Among the financial winners is the fast-growing debt settlement industry, which is primarily made up of online companies that promise to reduce personal debt by negotiating with banks and credit card companies on behalf of their customers. There is. However, consumer advocates point out that these companies often prey on financial despair and do not warn customers about potential consequences such as reaching court.

California State Legislatures are now considering legislation that will tighten the industry after significantly overlooking personal debt from credit cards and loans. Pandemic era law Focuses on reducing rent and utility debt. Invoice Has a long-standing debate in the Capitol about whether alternative financial services such as payday loans, debt settlement, and credit repair are financial predators or a necessary lifeline for Californians with little or poor credit. Is being revived.

Oakland Democrat Buffy Wicks, who drafted the bill, argues that existing federal regulations are not sufficient to protect Californians.

“If they work with these companies, make sure they give consumers transparency and empowerment in the process,” Wicks said.

Debt settlement mechanism

After her first call to debt settlement company ClearOne Advantage, she said she was impressed that the company would repay all of her debt and that she only had to pay the company once a month to repay it. It was. Balance.

“She made it easy to hear.” We are here to help you … your life will change. It will be very easy. “And I believe it. “Gomez said.

ClearOne Advantage declined to comment on Gomez’s experience. The company said it was testimony from a satisfied customer, but refused to provide Cal Matters with contact information so that they could be interviewed.

Desiree Nguyen Orth, director of Consumer Justice Clinic at the East Bay Community Law Center, explained how most debt settlement companies work.

Customers who have a debt settlement plan pay monthly to the debt settlement fund. According to Nguyen Orth, debt settlement companies wait for customers to default (which can take up to six months) before they begin negotiations with creditors.

According to Nguyen Oath, defaults need to occur before the negotiation process begins, but debt settlement companies avoid saying this explicitly. Debt settlement companies like ClearOne Advantage make money by charging their customers a percentage of their total debt.

In the best scenario, the voluntary creditor agrees to settle the debt for less than the debt amount. After the customer agrees to the new terms, the Debt Settlement Fund will be used to pay the debt.

The result is even worse if the creditor refuses to work with the debt settlement company. As part of the program, customers will sign a cease and desist letter prohibiting creditors from contacting them directly. In debt collection efforts, creditors sue customers, and judges often order them to withdraw money from their bank accounts or salaries.

“They came to me when they were sued, and they said,” Why am I being sued? I registered for a debt settlement plan. I don’t know, “Nguyen Oath said.

She added that most customers are unaware that they can negotiate with creditors. For free.

“I think (debt settlement) is one of the options we need,” said Tomas Gordon, CEO of ClearOne Advantage and president of the Consumer Debt Relief Initiative, an advocate for the debt settlement industry. “We educate people in the right way and voluntarily crack down on the industry to get the best possible results for consumers.”

“Why are there states that remove debt settlement as an option for these families during this pandemic?”

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

A ClearOne Advantage representative told her that she couldn’t help her without registering a debt of at least $ 10,000. We encouraged you to register your regular payment credit card so that you can participate in the program.

The Gomez-signed contract, reviewed by Cal Matters, does not mention the minimum requirements for enrolling in the program, but charges a fee valued at 25% of total debt. So the company will eventually charge her over $ 2,500. As of June 2021, Gomez had deposited $ 2,259 in her settlement fund, of which $ 1,053 was debited as service and transaction fees.

Only after Gomez was sued by Bank of America, she learned that all her credit cards had become the default and said she was currently facing a court ruling.

“If we knew we could be sued from day one, we would have stopped right away and tried to do more research to understand what would be paid (ClearOneAdvantage),” Gomez said. Said.

What does the bill do

Parliamentary bill 1405 does not change the way debt settlement companies work, but adds more regulation. Existing federal regulations are limited to companies that serve customers across state boundaries.

The state bill mimics some of these federal regulations, applies them to California-based businesses, and adds new rules, such as giving customers a three-day “cooling-off period” before the contract goes into effect. To do.

Despite the almost unanimous opposition from the Republicans, the bill is on the way. Some lobbying activities have eliminated opponents after successfully promoting amendments, including those that remove restrictions on referral fees, which are a major source of income for the industry.

But before the recent amendment, the debt settlement industry was coalescing against the bill. The Consumer Debt Relief Initiative, made up of members of the debt settlement industry, said the new regulation would harm consumers the bill is trying to protect by driving debt settlement companies out of California, leaving consumers with few options. Insisted.

“Why are there states that take off debt settlement as an option for these families during this pandemic?” Former Speaker of Parliament and Mayor of San Francisco Willie Brown said. Video of Consumer Debt Relief Initiative.. “It’s an essential service for those who need it most.”

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

Gordon, president of the group, said:

Congressman Wicks disagreed. “For villains, if they feel they can’t work in California, they can go somewhere,” she said. “And for good actors, they can stay here and help our working family in need.”

Gordon said he believes the bill is about benefiting banks and credit card companies that don’t have to negotiate their customers’ debt.

OneMain Financial, the only creditor in favor of the bill, declined to comment, Support letter Because of the bill, their main goal is to work directly with defaulted customers.

Prepare for debt settlement

Despite the withholding of loans under federal CARES law and the state-wide eviction moratorium to protect Californians Personal debt Credit cards, medical bills, etc. are mostly overlooked by lawmakers, exposing consumers to potential predatory practices with alternative financial services.

“It’s a huge bubble of people ready to settle debt,” Nguyen Oath said.

We expect the debt settlement industry to be very successful. At the meeting in February Consumer Debt Relief Initiative, According to Accenture’s market analysis, the industry predicts that the number of accounts enrolled in debt settlement services will increase by 75% in 2021.

The new California Consumer Financial Protection Act, which came into force on January 1, gave the state’s Department of Financial Protection and Innovation new authority to regulate the industry.The agency says it will not start tracking debt settlement companies Until 2023..

Is the bill well advanced?

According to Nguyen Orth, everything ClearOne Advantage did in this case is legal, so it’s unlikely that the AB1405 has changed significantly for Gomez.But the bill will address some more Terrible practice Nguyen Oath seemed to promise unrealistic results without advising clients on possible risks or offering predatory lending that could lead to further debt, she said. ..

Gomez terminated his contract with ClearOne Advantage at the end of June, but is working with Bank of America to resolve the proceedings and outstanding balances. What is her advice to others? Never avoid debt settlement companies.

“It’s an absolute scam. They prey on people like me,” Gomez said. “Call your credit card or collector yourself … it’s easy and the money goes directly to the person you borrow.”

Erika Paz is a reporter for Cal Matters.This article is part of California divide, A collaboration between newsrooms investigating income inequality and financial survival in California.

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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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