I received the following communication from a Greg Fitzgerald, debt settlement attorney who raised some excellent questions regarding the fiduciary duty and responsibility of debt settlement companies and the issues surrounds the unauthorized practice of law.
I think he has raised some good thought provoking questions and I’d love for readers to weigh in by posting feedback in the comments section.
I have come to believe that your site is “as advertised” in that you are trying to do what is best for consumers. It seems you and many of your contributors are genuinely trying to get at the truth of the matter in regards to the “debt settlement industry”. I sincerely hope your stated goals and that of AACC are successful. The purpose of this letter is to hopefully add to that objective. Despite my best efforts, I am unable to overcome an analysis that debt settlement companies suffer from a fundamental flaw. My hope is that your readers/contributors can educate me as to any flaws in my analysis.
At the outset I want to be clear that I do believe in debt settlement as a debt relief option. There is a segment of the population for which it is exactly the correct remedy. I believe that anyone who says there is no place for debt settlement is dead wrong. There are consumers for whom BK or DMPs are not the best options. While debt settlement can and does work, it is also true is that it is not for everyone. Unfortunately, over the past several years many in the debt settlement industry acted like debt settlement was the best option for everyone and overstated what they could do. These marketing and performance abuses have dominated the debate and the resulting regulatory/legislative/judicial actions now threaten the industry as a whole. In response, many in the industry are touting an admirable but not altogether new concept: put the consumer first. My first concern is: given that it is the provider who will be determining “what is in the best interests of the consumer” (presumably during a sales pitch), exactly how will that be done?
In my view, far more insidious than the unsubstantiated claims made by bad operators, is the DSC that does not “oversell”, but who nonetheless enroll consumers who have other, better, alternatives. That is, those DSCs that accept customers who should not be in debt settlement. My question is not so much about who is a suitable debt settlement candidate, but rather how they are qualified as such. How does the DSC make the decision that its services are the best option to the exclusion of other debt relief options? There is an inherent conflict in suggesting a particular course of action over others when the provider only performs one of the available debt relief services. The same is true for BK lawyers who only provide BK services.
The propensity for self-dealing is not so much an evil thing as it is a natural component of nearly every business relationship or transaction. The abuses seen in the debt settlement industry in recent years have forced regulators to address the issue. California’s pending legislation SB 708 mandates a fiduciary relationship that requires DSCs to do what is best for the consumer and in fact put the consumer’s interests above that of its own. That is the stated goal of AACC, and TASC is apparently talking the same game. So at least in this respect, everyone agrees: the best interests of the consumer come first. Unfortunately, unlike TASC suggests, the mere changing of the words used is not enough. The conflict still exists. It is what we do, not what we say, that counts.
Given this conflict, the sufficiency of the qualifying process becomes extremely important. It is this process, which does not end at the time of enrollment, that I believe to be fundamentally flawed. It seems that in order to determine the best course of action for the consumer, all possible debt relief options must be reviewed and weighed against each other, including DIY. It is not enough that the DSC has not misrepresented its services and made all the appropriate disclosures. They must do more if they are going to put the consumer’s interests before their own. And they must do this until the services are completed. The time necessary to complete the services many times results in changed circumstances such that debt settlement may not remain the best option. While the upfront qualifying analysis may be correct, the customer’s circumstances change over time (lost job, health, particularly aggressive collector) such that the analysis should be reviewed regularly in order to insure the best interests of the consumer are being advanced at all times rather than just at the time of enrollment. Perhaps the most common example is the consumer who couldn’t file BK because he made too much money at the time he hired the DSC, but then gets a pay cut and becomes eligible. What does the DSC do then? Does it go to its customer and say: you should consult a BK attorney now?
The fact is that from a strictly cost/benefit analysis, BK, if available, generally provides the best all-around relief from debt and debt collectors. Not always, but many times. The law today is that only lawyers can provide that advice. Therefore, the question remains: how does a DSC make this determination? On the one hand, BK, given its possibly superior financial advantages, must be part of the qualifying analysis. On the other hand, if the DSC does provide advice in this area, it is engaging in the unauthorized practice of law. Isn’t this a Catch 22 for all DSCs? Is there a way the DSC can provide the BK analysis and not be engaged in UPL? Does the DSC only enroll customers after a BK attorney has informed them BK is not an option? Isn’t the suggestion that the potential customer hire the DSC rather than file BK providing legal advice? Isn’t offering debt settlement services to a consumer who has not been consulted about BK (by the DSC or an attorney) failing to act in the best interest of the consumer?
Let’s assume that the consumer is referred to the DSC by a BK attorney who has determined the consumer is not eligible for BK. I think it is pretty well accepted that the ability to settle accounts for less than 100% can only be achieved when the borrower is in default. Default is actually a breach of a contract and can anyone other than a lawyer counsel consumers about breaching their contracts? (Again, in theory they can, but generally are not allowed to). I suppose the DSC does not have to tell the consumer to stop making payments as mandated by the FTC, but with all due respect to the FTC, a consumer who continues to make payments frustrates the ability to settle debt for less than 100%. The DSC is in another Catch 22 in that it can’t advise consumers to stop paying their credit cards, but nor can it be effective if they don’t. Does it have an obligation to inform its customers of this problem? What is the solution?
Let’s now assume that the potential customer is not eligible for BK and has already defaulted on his credit cards prior to contacting the DSC. The debt settlement analysis still requires a thorough review of individual finances and a great deal of experience across all aspects of the collection landscape. The best interest of the consumer requires a discussion of all possible ramifications. Particularly when the ramifications include lawsuits, wage garnishment, real property liens, etc. Clearly these are legal ramifications that appear to require legal advice. Are reputable DSC’s referring these customers to lawyers for a consult when this happens? Are they reassessing the appropriateness of their services with an eye towards possibly telling the customer that they, the DSC, are no longer the best option for them and should therefore cancel? Shouldn’t they be? I assume what happens is the DSC goes into hyper settlement mode in hopes of avoiding judgment against its customer. Fact is, the defense of an action is an important tool that should be made available to the consumer as appropriate. More to the point for purposes of this discussion, shouldn’t the DSC customer be thoroughly consulted about all these issues? Doesn’t that have to be by a lawyer? How does the DSC maintain the best interests of the customer in this situation?
There are a myriad of other issues (that can be quite complicated and consumer and/or account specific) that seem to require a legal analysis. What does a DSC do when the statute of limitations for an account has expired? The accounts are still collectible sure, but should they be paid? What about consumers who only have “exempt” income and no other assets? Are they advised that, by law, the collector should never be able to enforce a judgment? What is “exempt” income? Isn’t that legal advice? Shouldn’t all of this, in the best interests of the consumer, be disclosed to the consumer and doesn’t that disclosure require some legal analysis? What about which account to settle and when? Does the DSC use the customer’s $1000 to settle the debt buyer account for 10% (knowing they can’t or won’t sue, and by the way, earn more fees for the DSC) or do you use it to settle the Discover account at Zwicker for 50% who has sued? Don’t you have to discuss the lawsuit and its ramifications when securing this customer’s settlement approval?
What about the documentation that memorializes any settlement? Certainly it is in the consumer’s best interest that these settlement agreements be enforceable (I‘ve seen far too many that are not to be told this is not a problem). I assume that when the documentation is deficient the DSC rejects it and seeks something that adequately protects its customer from future collection on the account. Doesn’t that require some legal analysis as to what is or is not adequate? In my practice I can’t tell you the number of times I have to use that documentation to stop zombie debt and sue collectors. This is by no means an exhaustive list of concerns. Other concerns include settling post judgment accounts and direct interactions between creditors and consumers.
Again, I want to be clear: my concern is not the actual answers to these questions. It is that the best interests of the consumer require that the consumer be fully apprised on all issues so they can make informed decisions for themselves.
Yes, I am a lawyer. I do debt settlement. I defend collection cases daily. I file FDCPA claims regularly. I do not file BK cases. I have nothing against DSCs as many provide a very valuable service. Like you, I am genuinely interested in promoting what is best for the consumer. My only objective is to assist consumers in overcoming their debts, using whatever tools are available. In my mind, the more arrows in the quiver the better. One such arrow may be the DSC. In 20 years of practice I’ve repeatedly seen non- lawyers outperform attorneys. It seems to me however that, whether we like it or not, legal advice is necessary to determine which weapon is best suited for the consumer and that continuing legal advice is usually needed until the consumer is entirely debt free. It seems the Holy Grail for DSCs is to discover how they can put the best interests of the consumer first without providing the legal advice necessary for full disclosure and informed decision making. I’m hopeful someone can explain to me how this can be done.
Gregory Fitzgerald, Esq.
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