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Debt Relief USA Ran for Bankruptcy Cover But FTC Says “Not So Fast”

On August 17, 2010 the Federal Trade Commission sued Debt Relief USA, Kelly Reilly, Alvin Bell, James Wojcik, and Valerie Leath.

Previously Debt Relief USA had been in the news on this site. Part of that news was about how the company was running for cover to ditch their liabilities under a bankruptcy filing in 2009 in an effort to distance themselves from their deceptive marketing of debt settlement services.

What is most interesting about this case is that even though the company went out of business two years ago the FTC is clawing them back to answer for their deceptive marketing.

I did enjoy the line “Consumers who purchased Defendants’ debt relief services frequently sought a refund from the Defendants. Defendants routinely denied consumers’ refund requests.”

I keep saying it over and over but debt relief companies need to give full and prompt refunds to unhappy consumers to prevent matters from escalating. The focus should always be on client satisfaction and not sales. Sales without client satisfaction and truth leads to what you are about to read.

The sad thing is the lives of the defendants will never be the same again and this could have all been avoided.

The Suit

Defendant Kelly Reilly was the president and a 52 percent shareholder of DRUSA. At times material to this Complaint, acting alone or in concert with others, he formulated, directed, controlled, had authority to control, or participated in the acts and practices of DRUSA, including the acts and practices set forth in this Complaint. Defendant Kelly Reilly, in connection with the matters alleged, transacted business in this district and throughout the United States.

Defendant Alvin Bell was the executive vice president and a 20 percent shareholder of DRUSA. At times material to this Complaint, acting alone or in concert with others, he formulated, directed, controlled, had authority to control, or participated in the acts and practices of DRUSA, including the acts and practices set forth in this Complaint. Defendant Alvin Bell, in connection with the matters alleged, transacted business in this district and throughout the United States.

Defendant James Wojcik was the chief operating officer and a 20 percent shareholder of DRUSA. At times material to this Complaint, acting alone or in concert with others, he formulated, directed, controlled, had authority to control, or participated in the acts and practices of DRUSA, including the acts and practices set forth in this Complaint. Defendant James Wojcik, in connection with the matters alleged, transacted business in this district and throughout the United States.

Defendant Valerie Leath was the Director of Marketing and Director of Information Technology at DRUSA and a three percent shareholder of the company. At times material to this Complaint, acting alone or in concert with others, she formulated, directed, controlled, had authority to control, or participated in the acts and practices of DRUSA, including the acts and practices set forth in this Complaint. Defendant Valerie Leath, in connection with the matters alleged, transacted business in this district and throughout the United States.

The complaint goes on to say:

Since at least 2005, and continuing until approximately June 2009, Defendants DRUSA, Kelly Reilly, Alvin Bell, James Wojcik, and Valerie Leath offered a debt relief service to consumers having difficulty with their personal finances. Defendants targeted consumers with substantial amounts of unsecured debt, often claiming that participation in their debt relief service would result in the elimination of 40 to 60 percent of consumers’ debts and that participating consumers would be debt free in 24 to 48 months.

Defendants marketed their debt relief service on the websites www.4debtreliefusa.com, www.drusainfo.com, and www.debtreliefusa.us and through national television and radio advertisements.

Through their websites, Defendants represented that, for consumers to become debt free, “It typically takes about 24-36 months after we’ve negotiated the total amount of debt down to 40-60%. This includes all fees”; and stated, “Because we negotiate the debt down to a fraction of what you owe, your savings are far greater than any interest or late fees that could accrue.” Defendants’ websites encouraged consumers to call a toll-free number to learn more about Defendants’ debt relief service.

In their national television and radio advertisements, Defendants made claims such as “you can settle your credit card debt for pennies on the dollar without filing for bankruptcy” and “you typically save about half of what you owe and can truly be debt free in less than 36 months.” Defendants’ radio and television advertisements urged interested consumers to call a toll-free number for a free consultation and to enroll in their debt relief service.

Consumers who called one of Defendants’ toll-free numbers were connected to a sales representative. These representatives often told consumers that they could save a significant amount of the debt owed to their creditors by making low monthly payments to Defendants that would cover settlement of the reduced debt and Defendants’ fees. In numerous instances, Defendants’ sales representatives stated that consumers’ debts would be settled in 36 months and provided settlement averages such as 40 to 50 percent.

Defendants’ sales representatives typically told consumers that, in order for the debt relief service to work, consumers had to stop making payments to creditors and cease communications with creditors. These representatives told consumers to rely on Defendants to communicate and negotiate with consumers’ creditors. In some instances, sales representatives stated that, based on Defendants’ special relationships with creditors, Defendants could negotiate significant discounts for consumers.

Consumers who agreed to enroll in Defendants’ debt relief service were required to authorize a bank account debit over the telephone for the initial monthly payment prior to receiving enrollment documents. Among the enrollment documents were a Client Settlement Agreement (“Agreement”), forms authorizing recurring monthly withdrawals from consumers’ bank accounts, and a form used to identify the amounts owed to various creditors.

The Agreement was a five or six page single-spaced document. The Agreement contained provisions that often were not previously disclosed or were contrary to the representations on Defendants’ websites or in Defendants’ sales calls. For example, the Agreement stated “in no manner has DRUSA represented that Client stop making payments to their Creditors.” This contradicted the instruction in the sales call that consumers must agree to stop paying their creditors for Defendants’ debt relief service to work. The Agreement also indicated that creditors may choose not to participate in Defendants’ service.

Defendants charged consumers fees, including administrative fees, monthly maintenance fees, and negotiation fees. Defendants took these fees from the monthly recurring withdrawals consumers authorized. Pursuant to the Agreement, administrative fees were non-refundable unless consumers cancelled enrollment in Defendants’ debt relief service during a seven-day period following enrollment.

Defendants charged consumers an upfront administrative fee that was calculated as 8 to 10 percent of the amount of debt that consumers owed their unsecured creditors at the time of enrollment.

Defendants also charged a monthly maintenance fee of $29.95 or $39.95 for each month consumers were enrolled in Defendants’ debt relief service.

Defendants also charged a negotiation fee for each account settled. The negotiation fee was calculated as 13 to 15 percent of the purported savings the company obtained in the settlement. Many consumers never paid a negotiation fee because Defendants did not settle any of their debts.

After consumers enrolled in Defendants’ debt relief service, they received a reference booklet from Defendants. The booklet provided additional information about Defendants’ debt relief service.

The booklet stated it could take up to six months for DRUSA to achieve the first settlement. Additionally, consumers were instructed not to tell creditors to call DRUSA, and that DRUSA would inform creditors of consumers’ involvement in its service only when consumers were financially ready to settle one or more accounts. In numerous instances, Defendants did not disclose this information to consumers prior to their enrollment.

In numerous instances, Defendants did not contact or commence settlement negotiations with consumers’ creditors immediately upon consumers’ enrollment in Defendants’ debt relief service. Typically, Defendants did not contact or initiate negotiations with any creditor until after (a) consumers had paid the administrative fee in full and (b) consumers had accumulated enough funds in a “set aside” account to settle the debt with that creditor. Often, the first time Defendants mentioned this fact was in the Reference Booklet, which consumers received after enrollment.

For numerous consumers, it took over six months after enrollment to pay Defendants’ administrative fee in full and even begin accumulating funds for the first settlement offer. Throughout this time, Defendants typically did not contact consumers’ creditors and continued to advise consumers to cease making payments to and communicating with their creditors.

Contrary to Defendants’ representations, Defendants rarely negotiated settlements for all accounts consumers entered into the debt relief service. Moreover, even when Defendants succeeded in negotiating a settlement on one or more of the consumers’ accounts, the consumers’ account balances had increased from the time of enrollment to the time of settlement due to creditors’ additional late fees, finance charges, and other charges. Therefore, the total aggregate amount consumers were required to pay was, in numerous instances, higher than 40 to 60 percent of the total amount they owed to their creditors at the time of enrollment.

Contrary to Defendants’ representations that consumers would pay off their total debt in 24 to 48 months at a 40 to 60 percent savings and that consumers’ financial situations would improve, numerous consumers enrolled in Defendants’ service did not achieve the promised results. In fact, consumers frequently found that the amount of their debt actually increased due to creditors’ additional late fees, finance charges, and other charges. As a result, consumers’ financial situations worsened and numerous consumers did not have their total debt paid off in 24 to 48 months.

Few consumers enrolled in Defendants’ debt relief service ever completed the service and received the promised results. In numerous instances, consumers cancelled or dropped out of Defendants’ debt relief service before any debt was negotiated because they could not afford to pay Defendants’ substantial fees and also accumulate money to pay off their debts. Other consumers cancelled or dropped out because of harassment and escalating collection attempts by their creditors. Consumers who cancelled or dropped out after the seven-day cancellation period typically forfeited all fees paid to Defendants.

Consumers who purchased Defendants’ debt relief services frequently sought a refund from the Defendants. Defendants routinely denied consumers’ refund requests.

If you want to read the entire complaint, you can download it here.

Debt Relief USA Ran for Bankruptcy Cover But FTC Says Not So Fast
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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