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The Critical Flaw in The Attorney Model for Debt Settlement

It seems in the face of proposed regulation over the debt settlement industry many debt settlement companies are running for the hills and trying to convert their business into one of the many attorney models out there in order to continue their advance fee approach.

The companies who are running for the attorney model cover seem to feel it will provide them with a license in order to continue charging consumers in advance for debt settlement services. The belief is that in many states, attorneys are exempt from regulations and so the advance fee model can continue under the auspices of a lawyer.

Technically, that is a bit right but a lot wrong.

It is true that lawyers are exempt from many laws and currently the thought is that attorneys will be exempt from debt settlement regulation, and while they might be right now, don’t hold your breath it will stay the same.

Just recently the new Consumer Financial Protection Bureau was created and it will take a bit of time for it to get up and running but under the watchful eye of the Consumer Financial Protection Bureau attorneys are going to be regulated in the debt settlement and debt relief space.

Section 1027(e) provides a limited exclusion for attorneys. It bars the CFPB from exercising “any authority to conduct examinations of an attorney licensed by a State, to the extent that the attorney is engaged in the practice of law under the laws of such State.” However, the exclusion does not apply “to an attorney who is engaged in the offering or provision of any consumer financial product or service, or who is otherwise subject to any enumerated consumer law or any law for which the authorities are transferred” to the CFPB.

And debt settlement will be regulated under the CFPB in Section 1002, paragraph 15(A)(viii) providing financial advisory services to consumers on individual financial matters… including (II) providing services to assist a consumer with debt management or debt settlement , modifying the terms of any extension of credit, or avoiding foreclosure.

So since the CFPB specifically will regulate those debt settlement services it seems that attorneys would not get a pass under the CFPB.

The attorney loophole is already under the watchful eye of consumer advocates and the Federal Trade Commission. See this article. And in pending legislation on Capitol Hill under the Debt Settlement Consumer Protection Act the attorney model was effectively killed in an amendment seen here.

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The Critical Flaw

Currently attorneys are exempt from most states so they can carry on attorney run debt settlement services, but even now attorneys are being disbarred, bankrupted, closed down and jailed for debt settlement and debt relief related services. Don’t believe me, talk to Richard Brennan, Andy Nelms, Laura Hess, Bruce Atherton, or Brian Colombana.

What those who are enthusiastically thinking the attorney model is going to provide a safe harbor need to understand, there is no exemption for deception, misleading and fraud.

The weak link in the debt settlement business model is that charging consumers upfront for debt settlement services is the deceptive trade practice, not if it is run under an attorney or not.

As the evidence mounts, it is shown time and time again how little of a benefit consumers receive when they pay for debt settlement services in advance rather than pay for actual performance as debts are settled. Read this. No attorney is now or will be exempt from deceptive advertising or fraud.

No attorney is exempt or is going to be exempt from fee splitting. Another weak spot in the attorney model is paying agents, affiliates, or marketers of debt settlement services. It would take hardly any effort to show how money paid for debt settlement services was split among non-lawyers and the Bar associations don’t like that one bit.

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Add on top of all of that the building attack against the debt settlement escrow companies of Global Client Solutions and NoteWorld and how they are getting sucked into class action lawsuits for their involvement in deceiving consumers in concert with their debt settlement vendors. Shut down those companies and it puts a wrench in the works as well.

Oh yes, let’s not forget that these debt settlement attorneys are only licensed in one or a few states. They can’t provide legal representation outside of that area. Some groups have created networks of attorneys in different states to try to cover the unlicensed states but those correspondence attorneys rarely provide representation in court when the debt settlement client gets sued, which they will. That results in unhappy clients.

The attorney model does not correct the root of the problem, advance fee debt settlement is a fundamentally flawed process.

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The only thing that will happen for attorneys that put their name on debt settlement services is going to be unhappy clients who will complain to the state Bar association, attorney general and other regulators. That will put the attorney and the attorney’s license at risk. I bet other attorneys who let groups use there name to market debt related services would agree now that it’s a huge risk. Just ask Joseph Gembala, Robert Lock, John Nicolla, or Christopher Diener.

Putting an attorney in front of this mess does not change the reality that for most people with long debt settlement payment plans, stopping payments to creditors, continued collection activity, paying massive fees on enrolled debts, or getting sued by creditors — just does not work.

The efforts of the Federal Trade Commission to pass regulation have made it clear to reasonable people and the Attorneys General of 41 states that advance fee debt settlement is a deceptive trade practice levied against a disadvantaged class of consumers. And I don’t care if you are an attorney or not, when you charge for services you don’t provide and those services have already been shown to be questionable, there is no free pass.


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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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