It’s Been A Year Since The TSR – What’s Changed With Debt Settlement?

A year ago this month the Federal Trade Commission (FTC) barred debt settlement companies that used telemarketing from accepting up-front fees. Although it’s been an entire year since this change we are still see companies trying sneak in those up-front fees with businesses trying to exploit loopholes.

The whole purpose of the Telemarketing Sales Ruling was to help consumers from having to pay up front fees for services to reduce debt that were never delivered. However, legal retainers are not affected by the law so many debt settlement firms are partnering with lawyers to charge their up-front fees.

However, when consumers sign up with these attorney-based firms the probability of them actually speaking to or seeking the help of an attorney is slim. In fact, Illinois attorney general, Lisa Madigan, filed a civil complaint against Legal Helpers Debt Resolution LLC for their failure to have consumers speak with an attorney and for deceptive practices implying that their services were offered by a United State government program.

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Apparently Legal Helpers also charged 15 percent of a client’s debt over the first 18 months to cover costs of their settlement plan along with a $900 “legal flat fee” over the first six to nine months to cover attorney representation if they’re sued by creditors. It’s been reported the “firm has about 12,000 clients and represents about $500 million in debt. That’s an average debt of almost $42,000 per client…and would equate to up-front fees of $7,150” – Source.

It’s been reported that within the past year the Better Business Bureau (BBB) has received almost 2,500 complaints about debt relief firms.

The FTC has made no specific exemption for attorneys, said Joel Winston, associate director of the division of financial practices for the Washington-based agency.

“To the extent that there are firms who think that somehow the claim ‘I’m providing legal services’ exempts them from the rule, they’re mistaken,” he said. Winston declined to say whether all so-called “attorney-model” firms are violating the fee ban. He said the FTC had not brought any enforcement actions against firms for violating the up-front fee ban – Source.

As of right now there is no federal licensing requirements for debt settlement companies and many companies have made the switch to an attorney-based company relatively easily since the telemarketing rule came into effect. Some are even meeting face to face with consumers because of the “no telemarketing” rule. This however, does not always mean a company has the consumers’ best interests in minds because they meet with you face to face and hide, I mean operate, behind an attorney.

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Some of these companies are so desperate to hook new clients and consumers that they’re even advertising on Craigslist for attorneys in specific jurisdictions. A complaint was filled last year by West Virginia’s attorney general this past May against Morgan Drexen after saying they “would pay one lawyer in West Virginia a monthly fee of $500 for the first 300 West Virginia clients she served and $2 for every additional client, according to a copy of the attorney’s contract with Morgan Drexen” – Source.

Some firms began shifting to an attorney model before the FTC rule took effect because of loopholes for lawyers in state laws, said Scott Johnson, chief executive officer of USDR Inc., a settlement firm. Morgan Drexen has operated under its current business model since the company’s inception in 2007, according to the company’s assistant general counsel Erich Schiefelbine – Source.

Since the telemarketing rule came into effect the United States Organizations for Bankruptcy Alternatives (USOBA) has declined from more than 200 firms to around 30 while the American Fair Credit Council (formally the Association of Settlement Companies) has fallen to around 35 firms from their once 220 firms.

“They haven’t left the industry, they’ve left the trade associations because they don’t want to abide by a performance- based service fee,” said USDR’s Johnson.

However, on the plus side, according to Federal Reserve data, U.S. consumers held around $792 billion in outstanding revolving debt in July of 2011 which is significantly less then the $970 billion from 2008. According to CreditCards.com it breaks down to almost $16,000 in debt on average for households that carry a balance – Source.

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