By DAVID STREITFELD
Tyna Carter, burdened with $25,000 in credit card debt, did not want to be a deadbeat. After looking for help on the Internet, Mrs. Carter, a West Virginia homemaker, wound up in the hands of a sweet-talking ³credit specialist² from Texas.
He claimed his company, Credit Solutions of America, could set her on the road to a debt-free life. But what really happened, Mrs. Carter says, is that Credit Solutions pocketed nearly $4,000 of the couple¹s income, a little bit each month. Now they are in a deeper hole than ever.
It is a pervasive problem these days. With the economy on the ropes, hundreds of thousands of consumers are turning to ³debt settlement² companies like Credit Solutions to escape a crushing pile of bills.
As many as 2,000 settlement companies operate in the United States, triple the number of a few years ago. Settlement ads offering financial salvation blanket radio and late-night television.
Consumers who turn to these companies sometimes get help from them, personal finance experts say, but that is not the typical experience. More often, they say, a settlement company collects a large fee, often 15 percent of the total debt, and accomplishes little or nothing on the consumer¹s behalf.
State attorneys general are being flooded with complaints about settlement companies and other forms of debt relief. In North Carolina, complaints doubled last year, while in Florida they tripled, spokeswomen for the state attorneys general said. In Oregon, complaints have quadrupled since 2006.
The rapid rise of debt settlement is the result of two colliding forces: Americans owe more on their credit cards than ever, a result of the spending binge of the last decade. But as the recession deepens, their ability to pay is declining.
Kaulkin Ginsberg, a consulting firm, estimated that the amount of consumer credit at risk of default increased in February by $5 billion, to $24.5 billion.
High credit card rates and fees have been a point of contention for consumer advocates. On the NBC program ³Meet the Press² on Sunday, the administration¹s chief economic adviser, Lawrence H. Summers, said President Obama planned to crack down on abusive credit card lending that forces Americans to pay excessive interest rates.
For many consumers, their only hope for solvency is to get their balances down to a manageable level. But the card companies ‹ concerned for their own solvency ‹ are not inclined to let them off the hook.
Debt settlement companies claim they help both creditor and consumer by bridging the abyss between them.
³There is overwhelming demand for this service,² said Robby H. Birnbaum, a lawyer who is a board member of the Association of Settlement Companies, a trade group. ³People want to avoid bankruptcy, and this is their last resort.²
In practice, however, the debt settlement firms frequently manage to please no one. An executive of the American Bankers Association, representing the credit card industry at a recent forum, labeled debt settlement companies ³very harmful² to both creditor and consumer. Even debt collectors are upset, saying the settlement companies prevent them from collecting.
The premise of debt settlement is simple: A consumer stops trying to pay even the minimum on his cards. Instead, he accumulates money in an account that the settlement company promises to use to strike a bargain with creditors. Confronted with the certainty of some money now versus the possibility of no money later, the card company settles for 40 cents on the dollar or less.
Even if the goal makes sense, achieving it can be difficult.
Once the consumer stops paying the minimums, the card companies increase efforts to collect. Their fees and interest charges do not stop. They may sue. The consumer¹s credit score falls through the floor.
Long before making any attempt at a deal with creditors, the settlement companies take a fee. Credit Solutions deducted $233 from the Carters¹ checking account for three months, and then $116 a month for the next 27 months ‹ a total of about $3,825 by early this year.
It was a fee Mrs. Carter and her husband, Willard Carter, a miner who retired after he was injured, could ill afford ‹ especially since, by their account, the company put little effort into their case. ³After they got their money, they ran,² said Mrs. Carter, 51.
The Carters went to the West Virginia attorney general¹s office in January, joining a flood of that state¹s citizens complaining about debt relief schemes. ³We¹re being overwhelmed,² an assistant attorney general, Norman Googel, said.
Since 2005, Mr. Googel and his colleagues have successfully pursued cases against 14 companies promoting debt relief and debt settlement, resulting in refunds to 3,443 consumers, and they are pursuing more. And yet, he said, the complaints keep coming.
On March 26, Credit Solutions was sued by the State of Texas, which accused it of engaging in ³false, deceptive and misleading acts and practices.²
The suit says the company misrepresents its success rate, noting that the company¹s own data ³show that over 80 percent of the debts enrolled in the program do not settle.² Those debts that are settled, the suit says, are for higher amounts than the promised 40 cents on the dollar.
Credit Solutions said it would not comment on pending litigation.
The settlement companies are the latest response to an old question: How can debt-ridden people avoid bankruptcy?
The first answer was nonprofit credit counseling, which began in the 1960s. The counselors, financed by the credit card industry, helped consumers formulate debt management plans and negotiated lower interest rates.
Counseling lost some of its appeal after creditors largely stopped offering the concessions needed to get people solvent again. The National Foundation for Credit Counseling, an umbrella group for legitimate counseling services, announced last week that the country¹s top 10 credit card issuers had agreed to make changes to provide additional relief.
The diminishing effectiveness of nonprofit efforts created an opening for commercial settlement companies. Debt settlement is not regulated by federal law, as debt collection is, though general fraud and deceptive-marketing laws may apply. The Federal Trade Commission has successfully pursued seven cases against debt settlement companies since 2001, but one of the agency¹s commissioners, J. Thomas Rosch, said that such cases take time and staff.
³I favor self-regulation that¹s not a fig leaf,² Mr. Rosch said.
After inquiries from The New York Times, Credit Solutions sent a full refund to the West Virginia couple, the Carters, saying it was committed to customer satisfaction. The company blamed ³communications problems² for troubles with the Carters¹ account.
The Carters need every penny of their refund. They now owe much more than when they enrolled with Credit Solutions three years ago. For instance, interest and fees have increased the balance on one of their cards to $18,000, from $8,000.
³I was trying to do the right thing,² Mrs. Carter said, ³but it didn¹t work that way.²