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memorandum in opposition

UPDATED: Don’t Legalize Debt Settlement Scams in New York State

S.5215C (Griffo and Zeldin)/A.8212B (Morelle)

S.5215C/A.8218B seeks to eliminate New York’s longstanding ban on for-profit companies engaging in budget planning.  The term “budget planning” includes such services as credit counseling – budgeting, education, and financial counseling services – and debt management plans, whereby an individual makes payments to a budget planner, which then forwards payments, minus fees, to the individual’s creditors, generally after having negotiated lower interest rates and the waiver of penalty fees.

By their very nature, budget planning services are intended for those who are in difficult financial circumstances.  People facing difficult financial situations and seeking budget planning help cannot afford more than nominal fees.  Further, because these households are in debt already, they should not pay a higher portion of costs to a budget planner when the same money could be directed more effectively to reducing the household’s debt load.  The fact that for-profit budget planners seek to profit from the financial hardship of New Yorkers who self-identify as owing money to others is deeply concerning.

Opening the door to for-profit budget planners also raises concerns about the adequacy of consumer protective measures.  Any New Yorkers who engage the services of for-profit budget planners will be deprived of critical consumer protections because the for-profit budget planners do not have to comply with the IRS rules that govern not-for-profit, tax-exempt budget planners.  For example, a not-for-profit, tax-exempt credit counseling service cannot refuse to assist people who cannot afford their services, or who do not qualify for debt management plans.  Additionally, the board must be controlled by people who represent the broad interests of the public, not by persons who will benefit financially from the non-profit’s activities.  It cannot own more than 35 percent of a business that lends money, repairs credit, or provides debt management plan services, payment processing, or similar services.  It cannot buy leads of customers from third party vendors or sell names of customers to other providers.  

Because for-profit budget planners are not subject to these rules, they are allowed to steer their financially distressed customers towards affiliate or subsidiary companies that provide non-competitive or abusive services such as debt settlement, an inherently flawed and abusive business model that has drawn increasing scrutiny by federal and state regulators.  Debt settlement companies promise to help consumers escape from mounting credit card debt, while paying only a fraction of the money owed.  These companies promise to help consumers by negotiating directly with creditors.  Some of them even promise that a lawyer will help with the negotiations.  As the slow economic recovery continues to adversely affect working people, these companies offer their services as an alternative to bankruptcy.  Yet, most people who enter into debt settlement plans end up dropping out, burdened by even more debt and worse credit than before.

Further, the existing bill is flawed.  Though the bill purports to ban any fee or charge that is not “fair, reasonable and easily understood,” this language is far too vague to provide meaningful protection against fee-gouging to New Yorkers.  The inevitably higher fees charged by for-profit budget planners would severely hinder people’s ability to complete reasonable debt management plans.

The field of budget planning has long been attractive to scam operators who see financially struggling people as an easy mark.  Allowing for-profit budget planners would exacerbate this problem, legalizing a business model that is inherently unworkable and does not serve consumers.

Empire Justice Center strongly opposes S.5215C/A.8218B because it would undermine existing protections and open the door to abusive practices in ways that will harm financially-strapped New Yorkers.

Click on the supporting document below to view Memos of Opposition from other consumber advocacy groups.

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