“Debt Adjustment” – Meanest Racket Out
by Murray Bloom
“Get out of debt.”
“Restore your credit without a loan.”
“We can help you even if you’ve been turned down by everyone else. ”
In the past two years these and similar slogans have lured thousands of desperate Americans and Canadians into one of the meanest schemes ever devised. Cleverly disguised as a sensible means of helping debt-ridden families pay all their obligations off gradually through one agency, the scheme has served only to enrich the operators and to leave their victims more hopelessly in debt than ever.
Debt-adjustment is the formal name; more often it’s called “pro-rating,” “debt-lumping” or “debt pooling.” But by any name it’s usually “an incredibly vicious racket,” to use the description of Boston’s District Attorney, Garret H. Byrne.
“These operations,” warns Allen E. Backman, executive vice president of the National Better Business Bureau, “are well on their way to becoming a national scandal. Within the past year or two their number has multiplied and the geographic scope of their operations has increased at a prodigious rate.” The Boston Better Business Bureau adds:
“We have never run across as many pitiful cases of preying on public misery and difficulties as in this scheme.”
A recent survey indicated that nearly 200 firms are already in the field with more coming in every month in all parts of the country. Many have numerous branch offices in different cities. A few in the field conduct their operations honestly, although they are fairly expensive– most of them get between 12 and 18 percent of the client’s total indebtedness as their service fee. The rest– the vast majority– are out to get all they can as quickly as possible.
It’s A Snap
Not only are the profits tempting but the business is incredibly easy to get into. At this writing only Minnesota requires a license and a bond for those entering the field. In Colorado a nominal bond is needed. In Pennsylvania a special legal quirk now bars debt-adjusters unless they are lawyers. In all the other 45 states anyone can set up a business without license, bond or character reference.
You don’t need any special education or training. You don’t have to lend a cent to your clients. You merely contract to have them pay you a certain sum every payday so that can pay off their creditors piece-meal.
What is needed is a line of smooth talk and an armor-plated conscience. For the people who turn to the debt-adjusters are truly desperate. On the average they owe about $1500 to a dozen small-loan companies, auto-finance outfits and installment houses. In most cases just returning their purchases wouldn’t relieve them of their obligations. An end of overtime work or an illness suddenly makes their burden of debt unbearable.
Some clients know just how much they are committing themselves for but sign anyway. They are desperate. Anyone who can keep their creditors from hounding them, anyone who could keep “bricks”– garnishees– from falling on their weekly pay envelopes would be worth whatever he charged. Too many employers, they know, will fire workers as soon as garnishees are put on their wages.
Well aware of this fear, the debt-adjuster is slickly reassuring when you come to his office. He will put a wall around you to shield you from your creditors. They won’t dare bother you any more once you sign up with him. All the big credit and installment firms in the city are only too glad to work with him. He’s careful to keep his glowing promises verbal.
How much can you spare every week to pay off your debts? $20? Fine. He will apportion a bit to each of your creditors and in 18 months or two years you’ll be completely out of debt.
How much for his service? At first he’s vague. Just a few pennies a day. Just some bookkeeping charges. Few people read the small-print contract carefully; and even those who do seldom understand that they are committing themselves to pay up to 25 percent of their debts for the service– that in order to pay off their existing debts of, say, $1000 they might have to add another $250 of debt.
How It Works
One of the most brazen operations was run in Chicago. Clients had to pay a $75 “survey charge” as soon as they signed with this firm. Of course these debt-ridden men and women didn’t have that kind of money. they were simply sent next door to an accommodating personal loan company that lent them the money– at high interest and on their wages as security. Until this firm indicted by the U.S. Attorney last February, some 30 clients a day– seven days a week– were being signed up. The profits were enormous.
Consider the sad case of a Philadelphia postal employe. He owed $2500. The Financial Service System in Philadelphia offered to relieve him of all debt worries for a mere $500, or 20 percent. He knew it was high but if they did what they promised it would be worth it. He arranged to pay them $50 every two weeks until his $3000 was paid off. Six weeks after he signed and had paid in $150, the finance company came and took his car away. They said no payments had been made in more than a month. Angry, he tried to withdraw from the clutches of the Financial Service System. He could get out, they said, but it would still cost him $500.
He now found that a jeweler to whom he was supposed to be paying $24 a month hadn’t been getting paid by the debt adjuster. When he complained again, the firm said their books were being checked because an employe had absconded. when another creditor, a bank, complained that its payments weren’t being met, he got new excuses from Financial Service. This time he sensibly went to the Legal Aid Society of Philadelphia– and discovered that 70 others were complaining against the company.
“It cost me $500 to find out I could handle my debts better than they could,” was his grim comment.
In Kansas City several victims of another debt-adjustment service had similar experiences. One store clerk said: “My credit was nearly ruined because of the way this outfit handled my payments. Only after I took over my own payments was I able to save my credit standing.” A garage mechanic lamented: “They failed to come up to their agreement. They did not notify the creditors. Their word has been no good and jeopardized my job and credit.”
In Columbus, Ohio, the Better Business Bureau checked 28 complaints against one debt-lumping firms and found that although these clients had paid in $3804 the company had paid out only $1224 to creditors. A vigorous complaint brought a refund– of $9 to one client. And that was all. Nothing could be done about it.
Why? The contracts these clients signed enabled the firm to take its outsize fee out of the first payments made by the client. By one means or another the pro-rater makes sure he gets his fee first. Once he does, it isn’t surprising that he’s no longer interested whether the client makes any more payments or not.
In fact, if the debtor drops out it relieves the firm from further paper work. One firm, after it had collected its outsize fees, cynically advised clients: “Stop knocking your head against a wall. Go into bankruptcy.” D.F. Bush, the leading chain office operator in the field, who operates 31 debt-adjustment offices in 13 states and Washington, D.C., told me that only 10 percent of his clients ever complete their payments to creditors.
Actually, even 10 percent is surprising. For what the debt-adjusters never tell their hopeful clients is that the whole scheme is almost hopeless right from the start. As a result of sad experience, most creditors will no longer accept agreements from debt-adjusters.
Recently in St. Louis, where debt-lumpers have operated since 1941, the Better Business Bureau reported the reactions of 82 leading installment and credit firms to the debt-lumpers. The overwhelming majority agreed that the debt adjusters do not serve a useful purpose; do not pay promptly; do not pay off the entire account of the debtor; that regulatory legislation is needed to control them. But most important of all was this conclusion: 70 percent of those queried said flatly that they do not accept agreements from debt-adjusters.
Can’t the law do something about this racket? It isn’t easy, as many district attorneys and Legal Aid bureaus in several cities have discovered, because of the tricky contract the desperate client signs.
Philadelphia Tackles the Problem
In Philadelphia, Robert D. Abrahams, chief counsel of the Legal Aid Bureau, quickly realized the foolproof qualities of the debt-lumper’s contract. To help the 110 men and women who had complained to Legal Aid about their unhappy relations with the Financial Service System or U.S. Commercial Services he would have to pull an end run rather than attack at center.
After careful planning Abrahams hit both debt-adjusters with four plays that left them reeling. First he had a warrant issued for the arrest of one of the firms on the charge of violating the state’s unique Collection Agency Act. At the same time the state’s Banking Department brought action charging the firms were doing a banking business. Then Abrahams got the Bar Association to conduct an investigation to see if these firms were practicing law without a license. And finally he got the Retail Credit Bureau of Philadelphia to publicize the fact that it would give a free debt consolidation service.
The two debt-lumping firms fought hard in court and lost. The state promptly revoked their corporate charters. One week after their conviction both firms closed their Philadelphia offices and left the state. But Philadelphia remains one of the few major cities where no debt-lumpers are operating today.
In Boston, District Attorney Garret H. Byrne faced a similar situation last summer. Hundreds of complaints about six pro-rating firms were piling up but there was nothing in the statute books to cover their operations. Finally, selecting one of the more flagrant operators, Byrne indicted him for larceny and “general scheme to defraud.” His indictment, and the quick refusal of some Boston newspapers to take ads of the unsavory debt-lumpers, quickly drove most of them out of business.
Today there are four debt-pooling firms in Boston. They belong to a closely-knit Advisory Budget Council and adhere to a rigidly enforced code of ethics. Some of the key rules are: no firm may charge more than six percent of the client’s total indebtedness, the firm’s fee is to be pro-rated over the period of time that the debts are being paid off; if the client wants to cancel the arrangement he is charged only for the time he was in the plan. Thus, with the worst abuses eliminated, debt-pooling complaints to the Boston District Attorney are down to nothing today.
Still Other Ways
A similar self-policing arrangement is being attempted nationally by a group calling itself the American Association of Credit Counsellors with rules similar to those of the Boston group except that its constitution permits members to charge up to 15 percent of the client’s debt burden as a service fee.
Fortunately, there are several little known agencies that will help a hard-pressed wage-earner to liquidate his debts over a long period without danger of a garnishee or dunning by his creditors, at no cost whatever or at very low cost. Since they do not advertise, most people don’t know about them.
For example, a recent survey by the Associated Credit Bureaus of America shows that more than 30 city-wide credit bureaus all over the country run such services either at no cost– as in Philadelphia– or at charges that seldom exceed 10 percent. Typical and best known is the one run by the Spokane Retail Credit Association since 1918, which probably makes it the oldest service of its kind. The Pool Accounts Department of the Association has handled nearly 5000 accounts successfully and the charges are only $5 plus six percent a year.
Legal Aid Will Help
In some cities the Legal Aid Bureau, working in conjunction with the family welfare agency, will render a similar service, usually without charge. The Family Service of St. Paul has been doing this for clients since 1933 and has helped thousands. The Family and Children’s Service of Minneapolis, the Family Service Bureau of Chicago, the Family Service Association of Indianapolis, and others render a similar service.
In Ohio, debt-plagued families can turn to the Municipal Court for free debt-adjustment. The debtor lists his obligations and then sets forth his earnings and how much he can pay each week. Last year in Cleveland alone the Municipal Court paid $140,000 to creditors for nearly 500 debtors who were paying off their obligations under court protection and direction. Your local Legal Aid bureau knows if your state has a similar provision.
There is also a nation-wide means of helping families in such a fix. It is Chapter XIII of the Federal Bankruptcy Act, better known as the Wage Earners Plan. It does not involve bankruptcy. For three years the debtor’s wages can’t be garnished and he is allowed to pay off his creditors gradually. Usually between 10 and 20 percent of his wages are set aside for regular payments through the Federal Court. In 1952 nearly 7500 families all over the country were able to benefit from the provision of this plan. The costs are not cheap but if carried out with the free legal assistance of a Legal Aid Bureau it will cost no more than 10 percent of the total indebtedness in fees of various kinds.
No Easy Way Out
Even at best, none of these methods in an easy way to get out of debt. Families going into any of the debt-ridding plans have to get along on fairly rigid budgets for many months; the ability to incur new debts is tightly controlled. The whole procedure calls for considerable family discipline.
“Don’t kid yourselves– this is the hardest way out,” Morris Rabinowitch, a leading and ethical debt-adjuster in the San Francisco area, flatly warns his would-be clients. “The easiest way out is not to get in debt over your head.”
Most of the ethical men in the field that I spoke to agreed that today credit is just too easy to obtain for certain people. These people, they maintain, can no more resist excess credit than a drunkard can resist another shot of whisky.
“And mind you,” says V. N. Thoen of Minneapolis, who runs the oldest private debt-pooling agency in the country, “credit drunkenness isn’t something you find only among the poor. We’ve had hundreds of well-to-do clients like that. We’ve also had people you would think should know better: a state senator, the head of a large utility and even several credit managers of large firms.”
Thoen has drawn up four key points for the “Solvency Code” he gives to every client:
- Rigidly control impulse buying.
- Shop carefully for the best buy.
- Don’t sign any installment contract blindly.
- Keep a margin of safety. Anyone who mortgages his income 100 percent is headed for trouble. Remember, you can jump into debt but you have to crawl out.
“If people only kept those simple points in mind,” Thoen told me, “I and every debt-pooler in the country would be out of business in a month.”
Source: 1955, The Legal Aid and Brief Case, Vol. 13