Federal Trade Commission expressed alarm on the rising complaint against debt-relief companies since many consumers claimed that firms do little to help them settle their financial woes.
According to FTC, the number of complaints against debt-consolidation, debt-settlement, and credit counseling companies have doubled since 2007.
Forty State Attorneys of the Federal Agency reported a low turnout of successful settlements.
There are plenty of consumers who are in neck-deep debts, hiring debt-management providers with the hope of reducing payments or get repayment plans from their creditors or lending companies.
Debt-relief firms act as mediators between consumers and creditors. They handle negotiations with banks and card companies to settle a client's unpaid balance.
In response to complaints, FTC reiterated its August proposal for changes in regulating the companies, which includes disclosure of how these firms operate and the limiting of charge fees.
FTC wants to prohibit debt-relief providers to charge fees to its clients until the latter's standing debt has resolved - either settled, renegotiated, or reduced.
Generally, fees depend on a consumer's debt. The companies usually require their clients to pay 10 to 15 percent. It should be payable within a year, even if the settlement process drags on for years.
FTC also wants to require the debt-management providers to disclose to their customers how much time is needed to negotiate with creditors.
FTC cited an example in New York City, where a debt-relief company did not live up to its promise that consumers will only pay 60 percent of their debt balance. About 99 percent of its clients were unsatisfied with their services.
In Colorado, less than 10 percent of customers successfully settled their liabilities through the programs of 42 debt-settlement and credit-counseling companies.
A report to FTC from Attorney General's Office stated that credit counseling services in Colorado costs an average of $495, while an average of $1666 for loan-settlement. The debt-management process took about 41 months for credit counseling and 32 months for debt-settlement. More than 10,000 Coloradans hired the services of these firms.
In a study conducted by Dallas economist Bernard Weinstein, he said the debt-relief programs are effective means for consumers to pay their debts.
Susan Grant, director of consumer protection at the Washington-based Consumers Federation of America (CFA), said that the programs may help the consumers and clients, but the poor performance of the loan-management firms may further drown them to debts. The low turnout of successful settlement does not reflect the debt-relief firms' promise of easing the consumers' burden from overwhelming financial liabilities.