Debt settlement companies say they can help borrowers lower monthly student loan payments for a hefty upfront fee. Can they really? Experience suggests they cannot deliver all they promise. Federal and state regulators are finding instances of abuse as the companies shift from their traditional targets — credit card and mortgage debt — to student loans. Chapter 13 bankruptcy may be a better, and less expensive, option for persons overwhelmed by student loan debt.
Illinois recently became the first state to sue debt settlement companies based on student loan practices, contending in two lawsuits that Broadsword Student Advantage and First American Tax Defense duped vulnerable borrowers into paying for help that never arrived.
In the suit the Illinois attorney general, contends the businesses lured borrowers into paying hundreds of dollars upfront, and in the case of Broadsword, $49.99 a month after that, according to copies of the lawsuits reviewed by The New York Times. The companies often misled customers about those fees, according to the suits, and in some instances feigned affiliation with federal relief programs. The companies sometimes charged customers for debt assistance that they could have received for free from the Education Department.
To make matters worse, the Massachusetts legislature is considering legislation legalizing the operation of for profit debt settlement companies within the Commonwealth. Currently, only non profit debt settlement companies can legally operate here. Beware of TV ads promising more then they can deliver.