A HAIRCUT FOR DEBT SETTLEMENT COMPANIES

According to the Consumer Financial Protection Bureau, debt settlement companies increased sharply during the Great Recession of 2007 to 2010. Debt settlement companies promise to help people who are indebted to creditors by promising to renegotiate or settle a consumer’s debt.

In 2008, DebtSettlementUSA, concerned with an explosion of shoddy debt collection practices, similarly noted that growth in the debt settlement industry directly correlated with the size and scope of consumer debt. As more Americans were unable to pay their debts, the option of debt settlement became more alluring.

By the end of 2008, hundreds of debt settlement companies flourished in an little-regulated environment with no enforceable standards. Accompanying the expansion of debt settlement companies was the growth of shady companies that preyed on financially distressed families.

The damage caused by these actors was horrible. These actors often targeted debtors by falsely promising to negotiate with their creditors to settle or otherwise reduce consumers' repayment obligations. They charged cash-strapped debtors a large up-front fee, but then failed to deliver promised services. They would advise debtors to ignore their creditors and simply pay the debt settlement company a monthly stipend which supposedly would be divided among the creditors. In some cases, debtors became exposed to lawsuits, additional interest, substantial penalties, and attorney’s fees after the settlement companies failed to provide help.

The debt settlers would also lure financially distressed debtors into paying exorbitant fees by falsely claiming that they can remove negative information on a debtor’s credit report, even if the report was accurate. Attorney General Lori Swanson was sworn into office in 2007. She quickly backed legislation to regulate the debt settlement industry. In 2009, legislation was adopted to require debt settlement companies to become licensed and adhere to a long list of regulatory standards. In addition to becoming licensed, the debt settlers are not allowed to do the following:

Charge up-front fees
Tell consumers to stop paying their creditors
Tell consumers that the debt settlement company will protect them from interest, fees, collections, lawsuits, or garnishments
Tell consumers that the debt settlement company will improve their credit score
Tell consumers that the debt settlement company can negotiate a better deal than the consumer could without the debt settlement company
Fail to warn consumers, in writing, of many of the items above
Fail to warn consumers, in writing, that the settlement company cannot guarantee reduction or elimination of debt
Provide or offer to provide legal services unless the person providing the legal advice or services is licensed to practice law in the state of Minnesota.

The Act stands out as a successful resource in addressing abusive conduct in the debt settlement industry.

Upon enactment of the legislation, Attorney General Swanson filed numerous lawsuits against abusive debt settlement companies. For example, in August 2009, she filed lawsuits in Ramsey County District Court against three debt settlement companies: Priority Direct Marketing of Washington State, Clear Financial Solutions of Florida, and Moneyworks of Georgia. Some consumers paid advance fees to these companies of nearly $2,000.

Thereafter, in February of 2010, Swanson filed suit against six of the companies in four different district courts, claiming that they charged excessive fees, didn’t adequately disclose terms to the consumers, failed to explain the consequences of not paying the bills, and failed to post a surety bond. The companies included American Debt Settlement Solutions, Boca Ratan, Florida; Debt Rx USA, Dallas; FH Financial Service of Dallas; Morgan Drexen of Anaheim; Pathway Financial Management, Garden Grove, CA; and State Capital Financial of Florida.

In the same week, Swanson filed a lawsuit against One Source, Inc, an Arizona debt negotiator.

In contrast to Minnesota, debt settlement companies continued abusive practices in other states. On April 22, 2010, the Government Accounting Office issued a report to Congress about a survey undertaken by the Federal Trade Commission. The FTC conducted an anonymous survey of debt settlement companies and found that the following statements were made by the companies:

“You stop paying, uh, those payments out to these creditors. The only thing you are going to have to worry about is this payment to (us).”
“One hundred per cent of our clients stop making their payments as soon as they enroll into the program.”
“Say you enrolled in the program. At that point you would no longer make any of your credit card payments. All of them would go late.
17 of the 20 companies stated that they collected advance fees before debts were settled.
The advanced fee would be 12% to 18% of enrolled debt.
Companies claim a success rate of 85 per cent, 93 per cent, and even 100 per cent. In fact, the BBB stated that no debt settlement company was able to establish that it had a success rate of 50%
The company is licensed and regulated like the SEC reguates stock traders.
The company is affiliated with a government relief program.

The pace of the litigation continued throughout the recession. In 2012, Legal Helpers Debt Resolution of Chicago was ordered by the State to cease and desist from further operations.

In 2013, the Consumer Financial Protection Bureau sued Morgan Drexen, Inc., the debt settler sued by Swanson in 2010. In 2016, Morgan Drexen was barred from collecting fees from consumers nationwide. These cases illustrate the importance of government regulators to pay attention to consumer feedback and to use the tools in their toolbox to write new laws and enforce existing laws for the benefit of the public.

References:

“Recent Trends in Debt Settlement and Credit Counseling,” Consumer Financial Protection Bureau, July 2020.
https://www.ftc.gov/sites/default/files/documents/public_comments/debt-settlement-industry-public-workshop-536796-00028/536796-00028.pdf
“Minnesota AG sues debt aid companies,” Winona Daily News, September 23, 2009.
Browning, Dan, “State sues six debt “helper” companies,” Star Tribune, page 1A, February 18, 2010; State sues debt 'helpers'startribune.com; Minn. AG sues 6 debt settlement companies Twin Cities
Letter and summons & Complaints sent by Swanson to Bureau of Consumer protection on February 23, 2010. 543670-00330.pdf (ftc.gov) Minnesota orders debt settlement firm to close startribune.com
GAO, “Debt Settlement, Fraudulent, Abusive and Deceptive Practices Pose Risk to Consumers,” Testimony before Committee on Commerce, Science, and Transportation, U.S. Senate, April 22, 2010.
CFPB Wins Final Judgment Against Morgan Drexen for Illegal Debt-Relief Scheme | Consumer Financial Protection Bureau consumerfinance.gov