Debt reduction or debt relief companies promising that debts can be settled for pennies on the dollar are probably scams. Photo Credit: Jon Sullivan/released to Public Domain.

Over the past few years, some may have noticed a greater number of advertisements and other media relating to debt relief or debt settlement companies. Though many of these companies are legit, there are a number that are scams. Despite increased regulations, there are still a lot of fraudulent debt relief companies out there.

Crooks ignore Federal Trade Commission regulations

More than half a year ago, the Federal Trade Commission created new regulations to help deal with the growing number of complaints about ineffective or fraudulent debt settlement and debt relief companies. Debt servicing companies, according to KNDU, an NBC affiliate in Washington state, are prohibited from asking for an advance fee, have to make specific information available up front and cannot misrepresent themselves in any way. Companies have to give customers realistic estimates of how much money the could save and disclose exactly what fees are included in the service. However, some companies are not following the law.

Large debt relief company busted

Freedom Debt Relief was stung recently by the states of Washington and New York for not following laws regarding debt services, according to WalletPop. The California firm was found to have misled consumers in those states. The company agreed to a settlement of nearly $2 million to be paid to its customers in both states. The company previously settled similar cases with four other states and is currently part of a class action lawsuit. The Federal Trade Commission, according to the Wall Street Journal, recently won large settlements against two debt management companies illegally “robocalling” customers with automated phone messages. Advanced Management Services NW and Dynamic Financial Group were found to have robocalled customers and told those who responded they could reduce debt for a hefty upfront fee. Advanced Management Services offered a refund if efforts were unsuccessful, but both companies would just pocket the cash and send a card telling customers to pay credit card bills on time.

Too good to be true

The old maxim that “if it looks too good to be true, it probably is” holds true when it comes to debt settlement companies. The Federal Deposit Insurance Company and Federal Trade Commission both warn that any company promising to remove negative items from credit reports or a settlement for “pennies on the dollar” is probably a scam. Also, it is illegal for any debt settlement or debt reduction company to ask for any money whatsoever until after the debt is reduced or somehow changed. There are also plenty of nonprofit debt counselors who can help consumers come up with a debt reduction plan. The FDIC advises consumers look at a not-for-profit credit counseling service before looking at any for-profit debt reduction service. For instance, check with the National Foundation for Credit Counseling to find qualified financial advisers in the area.

Sources

WalletPop

KNDU

Wall Street Journal

FDIC

FTC

National Foundation for Credit Counseling

Losing the ability to offer loans against tax refunds has caused tax preparation giant Jackson Hewitt to seek bankruptcy protection. Photo Credit: kenteegardin/Flickr/CC-BY-SA

Tax preparer Jackson Hewitt recently filed for Chapter 11 protection for a short bankruptcy. Hewitt and other tax preparation firms were dealt a heavy blow when changing regulations made it impossible for tax firms to secure funding for tax refund loans. Refund anticipation loans are often vilified alongside payday loans as preying on the poor.

Rule change sends tax preparation industry into tailspin

In 2010, a rule was changed that has severely hampered tax preparation firms, especially those that made much of their money from offering short term loans against tax refunds, or refund anticipation loans. The Internal Revenue Service informed preparers that they will no longer be able to see whether a person is receiving their entire refund, according to USA Today. That caused  funding partnerships to dry up. H&R Block dropped refund anticipation loans altogether before the 2011 tax season. Jackson-Hewitt became the largest entity offering them. Because of the IRS rule, bank regulators consider the loans too risky and therefore look dimly upon companies that still lend them, according to Reuters. Because of that, Hewitt has not been able to secure further financing on its debt and has filed for Chapter 11 protection.

Quick bankruptcy

Hewitt maintains it will be in bankruptcy protection only for a few months, in order to restructure itself and begin repaying its debts. The company got in trouble with its lenders because Hewitt relied heavily on refund loans and needed financial backing to fund the loans and got heavily in debt. However, the company intends to come out of bankruptcy and no longer rely on tax refund loans. The last major organization funding the refund loans, Republic Bank and Trust, is currently in the midst of a battle with the Federal Deposit Insurance Corporation. Republic, according to BusinessFirst, is being fined $2 million by the FDIC for continuing to fund the loans despite warnings to stop doing so. Republic maintains that because it made a record profit during the first quarter of the year while funding the loans, the loans can be lent responsibly.

Credit product disappearing

The refund anticipation loan, or RAL, is going extinct. Consumer groups liken them to payday loans; a person who has their tax returns prepared and is getting a refund is offered a portion of the funds immediately by the preparer. The refund is turned over to the preparer, with the difference being the “fee” for the lender. For instance, a person receiving a $600 refund is offered an RAL of $530 by a preparer, and the customer gets the cash within a few days rather than waiting weeks for a check from the IRS. If the return is accepted, the customer gets the RAL and the preparer gets the refund once the IRS disburses it. The FDIC objects to banks funding RALs because no credit check can effectively be performed before disbursing the loan to the customer.

Sources

USA Today

Reuters

BusinessFirst

Tax preparation giant H&R Block has lost significant ground since the tax preparation service cannot offer a cash advance against tax refunds this year. Image from Wikimedia Commons.

The loss of the ability to offer a cash advance against tax refunds has caused revenues to fall for tax preparation giant H&R Block. The latest earnings reports for the company indicate that revenues so far are less than expected this tax season. Earlier this year, the company was forced to abandon refund anticipation loans when a key partner was sued by the FDIC.

Tax season off to a slower than normal start

A decline in people paying to have their tax returns prepared has led to a decline in revenues for tax preparation giant H&R Block, according to CNBC. Block expects  January earnings will come close to breaking even, but activity began to pick up in mid-February. From Jan. 1 to Feb. 15, online returns prepared through H&R Block increased by almost 28 percent, though total digital tax returns only registered a 7.3 percent increase since the start of the year. Preparation fees for H&R Block have declined by 7.6 percent since the start of the year, and part of the loss is because the company is no longer offering the popular refund anticipation loan, a cash advance against an income tax refund.

Blocked from lending by suit against key partner

Short term loans against tax refunds are similar to payday loans, in that a customer is advanced cash immediately instead of having to wait for their tax refund. The refund is signed over to Block, and borrowers receive less than the total refund because fees are deducted. In December of 2010, H&R Block announced that the company would not be offering refund anticipation loans, a very popular product among lower and mid-income customers. A key partner in the financing of the loans, HSBC, was enjoined by the Federal Deposit Insurance Corporation from lending refund loans. Nearly 17 percent of Block customers took out a refund anticipation loan in 2010.

FDIC countersued by refund loan lender

A prominent tax refund lender has sued the Federal Deposit Insurance Corporation for interfering in the tax refund loan business, according to Business Week. Republic Bank and Trust, a bank based in Kentucky, is suing the FDIC and claims the agency overstepped its boundaries by labeling the loan products “unsafe and unsound” when the FDIC ordered Republic to stop lending the loans last month. Republic lent more than $3 billion in refund loans last year to almost 836,000 people. The bank observed a default rate of only 2.13 percent. The suit alleges that the FDIC is trying to coerce loan lenders into dropping a product that government officials don’t like, even though the product is popular.

Sources

CNBC

Business Week