Regulation of Debt Settlement Companies Looming

This is a guest post by Kenneth Long, President of Fiscal Progress. If you would like to submit a guest post for publication, just send me an email to guestpost@getoutofdebt.org.

Steve

On September 25, 2008 the Federal Trade Commission (FTC) held a public workshop to explore the for-profit debt settlement industry. Panelists representing debt settlement companies, consumer advocates, regulators and other interested parties weighed in on the effects that debt settlement companies have on consumers.

The Association of Debt Settlement (TASC) actively participated in the workshop on behalf of its member companies. It touted research by Dr. Richard Briesch claiming that debt settlement companies provide greater welfare to debtors than credit counseling organizations. However, a detailed review of his study reveals major flaws in the findings and in the conclusions.

Since that time, there has been no change in federal laws regarding debt settlement companies. States however have been active.

New York, in particular has taken strides to curb abuses by several leading debt settlement companies. The Attorney General began investigating Credit Solutions of America and Nationwide Asset Services. Nationwide Asset Services was penalized $198,100 for fraud and deceptive advertising. In May 2009, Attorney General Mario Cuomo announced a national investigation of debt settlement companies. In his announcement, Cuomo labeled debt settlement as a “rogue industry.”

Cuomo’s office issued subpoenas to 14 debt settlement companies and 1 law firm as a part of this broader investigation. Companies that received subpoenas include: Allegro Law, American Debt Foundation, Inc.; American Financial Service; Consumer Debt Solutions; Credit Answers, LLC; Debt Remedy Solutions, LLC; Debt Settlement America; Debt Settlement USA; Debtmerica Relief; DMB Financial, LLC; Freedom Debt Relief; New Era Debt Solutions; New Horizons Debt Relief Inc.; Preferred Financial Services, Inc.; and U.S. Financial Management Inc.

Since that time, Allegro Law has already been shut down by regulators in Alabama. $12 million in assets were seized for the purposes of providing refunds to clients defrauded by the debt settlement company. Clients of Allegro Law are expected to receive average refunds of about $800, even though they paid in thousands of dollars.

Clients of another large debt settlement company that was shut down were paid only 25% of their total deposits in December, 2009. That firm, Hess Kennedy and its related entity, the Consumer Law Center defrauded clients out of funds that they thought were being used for settlements.

In these cases, clients were lead to believe that actual attorneys would be working on their behalf to negotiate settlements. In all actuality, lawyers at these firms spend all of their time just trying to delay legal action so that they can earn their profits and get out. At Hess Kennedy, only Laura Hess was a licensed attorney. The other partner in the firm reportedly held no law license.

Rampant abuse in the debt settlement industry has caused Attorneys General in Colorado, Minnesota, West Virginia, North Carolina, Florida and Texas to go after individual debt settlement companies directly. They are trying to stop the deceptive advertising, fraud and fleecing of debtors of what little money they have left.

In the case of Nationwide Asset Services, the Attorney General found that less than 1% of its clients actually received the promised 25 to 40 percent reduction in their debt. Interestingly, Nationwide Asset Services was also required to report on 180 of their clients who actually did complete their plans, yet paid more in settlements and fees than they owed before they even started the plan.

Creditors are no better fans to debt settlement companies than state regulators. They must normally sue a client of a debt settlement company in order to be able to collect their balances, since the client stops paying them in order to fund their debt settlement plan. Creditors would much rather clients go through credit counseling so that they can begin repaying their balances at improved terms while receiving counseling and education.

Since the FTC has been inundated with calls for regulation of banking and securities industries, they have largely overlooked the debt settlement industry since the 2008 workshop. However, the states are becoming more active in protecting their residents from fraud. As a result, several debt settlement companies representing the bulk of debt settlement clients are facing legal challenges from multiple states.

Those companies that continue to use deceptive advertising to promote their high-priced services will face the most legal action. As more states increase their regulation of the debt settlement industry, the FTC will ultimately be forced to increase regulation of this “renegade industry” to increase protection to all Americans.

In the mean time, consumers should be skeptical about claims by companies who promise to help. They should have a favorable rating with the Better Business Bureau or otherwise be free of patterns of complaints. Most importantly, if it sounds too good to be true, it probably is.