Our recent era of “self regulated” financial services seems to have a way of converting scams into large - scale businesses. Payday lending, for instance, has emerged through blind spots in state and federal law, and has been a scourge for working people across America. Anecdotally, one hears there are now more payday lenders in the US than there are McDonalds restaurants and Starbucks shops combined.

It looks like another predatory business, birthed through loopholes, is starting to plague struggling Americans: credit consolidation services. With prices rising, jobs more scarce, and credit terms tightening, it is easy to understand the importance of credit consolidators for people seeking a responsible way to right a tilting financial ship. But an illuminating article in the Wall Street Journal about predatory debt-relief (Debt Relief Firms Attract Complaints, Eleanor Laise, 10/14/2008) shed light on the perils that folks face when trying to responsibly manage their debt. According to the article:

“Debt-settlement companies generally advise their clients to make monthly payments into a special account instead of paying creditors. The firm promises to use the accumulated cash to settle debts for pennies on the dollar. They often charge hefty up-front fees, and their tactics can trash customers’ credit scores, boost their tax bills and leave them in greater debt than when they started…Meanwhile, creditors aren’t getting any payment, so interest and late fees accrue, debt rises and clients get a steady stream of calls from creditors and collection agencies. They may even have their wages garnished.” Click here to view the entire article.

Adding injury to injury, many of the firms referenced in the article abuse the tax exempt status of a nonprofit by funneling cash back to a for- profit owner. Instead of acting the way most nonprofits do – helping the community, they make money for parent companies at tax payers’ expense. Aside from being fraud, this kick-back scheme also taints the fine work of real nonprofits that help struggling debtors through services provided with integrity, quality and transparency.

All signs point to even harder financial times ahead. State and federal officials need to ensure that predatory debt consolidators feel the heat of regulation and enforcement. Americans literally cannot afford the alternative.