Complaints About Debt Consolidation

According to the U.S. Federal Reserve, outstanding consumer debt totaled out at $2.55 trillion in 2009. Debt consolidation agencies work to assist consumers by consolidating total debt owed. Consumer complaints made to state and local regulatory agencies point to fraudulent business practices and rampant money mismanagement within the debt consolidation industry.

Misrepresentation

Debt consolidation services attempt to reduce consumer debt by coordinating and renegotiating payments plans with creditors on behalf of consumers. Many agencies operate under a "not-for-profit" status, which gives them special tax considerations under the law. According to Bankrate, a financial news and resource site, investigations carried out by federal agencies and regulating committees in 2004 found as many as 50 different debt consolidation agencies engaging in certain business practices that place their tax-exempt status in question. In effect, the less reputable agencies were found to earn substantial profits through unscrupulous money management practices. The monies in question came from payment plan transactions carried out by debt consolidation agencies on behalf of their customers.

High Fees

Debt consolidation agencies allow consumers to make one monthly payment to them on the assumption that the payment will be portioned out to creditors based on an agreed upon payment plan. In exchange for their service, agencies charge administrative fees that vary depending on contract terms. According to Bankrate, some companies are reported to charge fees as high as 3 percent of the consumer's debt while other agencies kept the first month's payment as the service fee depending on the terms stated in the contract. About 25 states have licensing requirements for debt consolidation agencies. However, these agencies are not held to these requirements because of their not-for-profit status.

Inactive Payment Plans

The payment plan arrangements made by a debt consolidation agency typically last anywhere from three to four years. A legitimate payment plan would include lower interest rate payments and eliminate late fee charges, all of which is arranged between the agency and the creditors. Creditors, in turn, give the agency a percentage of these payments back, which is meant to cover the agency's operating costs. According to Bankrate, consumer complaints regarding inactive payment plans resulted in the Massachusetts attorney general's office filing suit against a debt consolidation agency in 2004 for mishandling consumer monies and charging high fees. In effect, the agency failed to pay its clients' creditors, which resulted in additional late fees and penalty charges for those affected. The Massachusetts case is one of many class action suits brought against debt consolidation agencies.