Debt protection, also sometimes referred to in the industry as debt cancellation or credit protection, has come under increasing scrutiny in recent months.
So much so that Bank of America has announced it won't be offering the service to new customers and it will end for existing customers probably by next year.
Costa Mesa Chapter 7 Bankruptcy Lawyer Vincent Howard of HOWARD LAW wants to make other consumers aware of the potential pitfalls you face if you sign on for this service with some other bank or lending institution.
Some background on the service and what it entails:
It's called "protection" because the intent, at least as it was marketed, as that it would act as a kind of insurance in case you faced a personal debt crisis. Let's say you lost your job or were going through a divorce, some of the key obstacles to financial health. The debt protection plans were outlined so that for a monthly fee paid ahead of time, you could forgo your monthly minimum payments for a period of time until you could get back on your feet.
Now, this might sound like a good program, and in theory, it is. However, it's riddled with problems, primarily because these institutions pile on the fine print, making it very difficult for customers to reap the benefit during hardships.
For example, certain plans only cover certain hardships. You may enroll in a plan that covers you in case of job loss, but not in case of a disability. Or it may cover you for disability, but not if you are on temporary leave for having a child. Or if you have unemployment protection, there may be very specific criteria about what "unemployment" means, i.e, were you working more than 30 hours a week for the last three months, etc. It's the financial institution (or its subsidiary) that lays the ground rules, and it's often not to your advantage.
Secondly, a number of these plans have a benefit cap. Sometimes, it might only amount to $500 total. When you look at recent figures released by the Government Accountability Office, creditors raked in about $2.5 billion for debt protection services last year. However, they paid less than a quarter of that back. You have to question whether anything that profitable banks is of any significant value to you.
Thirdly, there has been a fierce backlash from consumers alleging that they were deceptively sold the debt protection service. In fact, the Consumer Financial Protection Bureau fined Capital One bank approximately $210 million for such practices, two-thirds of which was refunded to some 2 million customers. This is just at one bank - an institution that has yet to halt the promotion of the service.
Further, as was noted by the CFPB, the allegations against Capitol One were not unique to this institution alone. The fact is, numerous other banks offer this service.
And despite Bank of America's insistence that it's bowing out in order to streamline services, the truth of the matter is, they're trying to save themselves a similar fine.
Meanwhile, JP Morgan Chase & Co. have specifically said they plan to continue offering the service. With return rates like that, who could blame them?
But there's an even bigger problem with regard to debt protection plans, and that is this: They provide a false sense of security.
The fact is, if you're behind more than a month or two on your bills, you're already in serious financial trouble.
The good news is we can help.
Costa Mesa Bankruptcy Attorney Vincent Howard at HOWARD LAW can help. You can reach us toll-free at 1-800-872-5925 or send us a message online.
Beware banks offering debt protection, Sept. 6, 2012, By Stacy Johnson, MSN Money
UPDATE: Bank of America Nixes Debt-Protection Product Amid Industry Scrutiny, Aug. 21, 2012, By Andrew R. Johnson, Wall Street Journal
More Blog Entries:
Bankruptcies on the Rise as U.S. Incomes Fall, Sept. 9, 2012, Costa Mesa Chapter 7 Bankruptcy Lawyer Blog