The Louisiana woman was $31,000 in debt.
Desperate to get out of her financial problems, she signed with a Florida firm that promised to settle with her creditors for less than she actually owed.
The company required $4,000 up-front, which the woman paid into a special-use account. Then she sent them another $3,000. That was when she received a tip: The company was a scam.
After multiple unanswered phone calls, a certified letter to the firm and a formal complaint to the Louisiana attorney general’s office, the woman received only a portion of her money back.
As the national recession drags on, debt-relief firms have inundated Americans with their advertisements on the radio, television and Internet, promising to “make you debt-free fast!” and “reduce your debt by up to 60%!”
But an increasing number of Louisianans apparently are discovering such guarantees frequently are too good to be true.
Isabel Wingerter, deputy director of public protection for the Louisiana attorney general’s office, says her office is fielding a growing number of complaints against such firms.
Many people expect the situation to worsen, especially if workers lose income or jobs because of the Deepwater Horizon oil spill or a moratorium on deepwater drilling.
“Because of the job situation and the economy, a lot of people are finding themselves in dire straits they weren’t in before,” Wingerter says. “They might have been managing day to day, week to week or month to month, and now they find themselves on the verge of losing their home or their car. They send huge amounts of money to these firms, and never hear from them again.”
Debt-settlement firms are different from debt-consolidation firms—where borrowers are offered one big loan to pay off their smaller debts—and from credit counselors, agencies that structure low-interest payments so clients can pay off their debt over time.
By comparison, debt-settlement firms typically advise their clients to stop paying their bills and instead save up cash, which the company will then use to negotiate lump-sum settlements. The companies charge fees ranging from 15% to 20% of the client’s credit-card balances, typically demanded up-front and kept whether the debt is reduced or not.
Debt relief is emerging as a highly profitable industry, given the current state of the economy as well as recent changes in bankruptcy laws that make that remedy less accessible for consumers. One study on consumer debt suggests more than five million Americans are enrolled in some sort of debt-management, consolidation or settlement program.
The New York Times reports that within the industry’s two leading trade associations—the United States Organizations for Bankruptcy Alternatives and the Association of Settlement Companies—250 companies collectively enrolled more than 425,000 customers with $11.7 billion in credit-card balances.
But as customers have increased, so have complaints. More than 21 states have pursued action against debt-relief companies, according to the National Association of Attorneys General, and the Federal Trade Commission reports consumer complaints have more than doubled over the past two years. The agency is expected to issue new regulations this summer. And the U.S. Government Accountability Office has done its own undercover investigation, posing agents as customers at 20 debt-settlement firms.
In Baton Rouge, trustees in federal bankruptcy court report having pursued legal action against several companies that have charged fees without providing any services. A provision in the law considers such acts to be a fraudulent conveyance.
Derren Johnson, a local bankruptcy lawyer, says one of every five of her clients has had some sort of negative experience with a debt-settlement firm.
“I’ve had people come into my office who have paid $3,000, $4,000 or $6,000 to a company and gotten nothing for their money,” she says. “They can’t find a creditor who has gotten paid a dime. Almost everyone who has come in has gotten ripped off. They were all told not to pay their bills, because it gives the company an advantage in negotiations if they are behind on their payments.”
Local attorney Dale Baringer tells the story of a client who recently came to him, asking for advice about signing a contract with one such company. Baringer suggested he do some basic research—starting with Google—and the client discovered the principal behind the firm had a criminal record. He never signed the contract.
Another Louisiana woman who filed a complaint with the Louisiana attorney general’s office wasn’t so lucky. A debt-relief firm contacted her on her cell phone in October 2009, offering to lower the interest rate on her credit card.
The self-proclaimed financial adviser promised that the firm could save her a minimum of $2,500 or more, for a fee of $995. If the company failed to do so within 30 days, she would receive a refund.
Three months later, the financial adviser called back to let her know she already had the lowest rate offered by her credit-card company, so she requested a refund. She never received it, and the company’s telephone number has been disconnected. The Better Business Bureau told her it could offer no assistance because it couldn’t contact the firm.
“I know, as an American citizen, companies should not be allowed to treat consumers this way,” she wrote in her complaint to the state attorney general. “I would be grateful for any and all help you could give me.”
Walter Morales III, a finance instructor at LSU, says many people working in the debt-settlement market are former bank or credit employees with an insider’s view of how far their former employers might be willing to go to get a portion of what they’re owed.
“There’s definitely a place in the market for these guys,” he says. “The other side of this is that they know—especially the ones who have been around for a long time—what banks have offered other debtors at times.”
But, he says, the reality is that banks are not in the business of taking widespread reductions on loans. In cases of severe debt troubles, some enterprising customers can negotiate a feasible settlement themselves.
“At the end of the day, the deal you get is going to be the same whether you have a debt counselor or not,” Morales says. “That’s because it’s going to be based on what you can afford to pay.”
Those people who decide to go the route of a debt-settlement firm should keep in mind these suggestions from local financial experts:
Exercise due diligence before you speak with a company representative. Ask for references, and find out how long the company has been in business. Look for accreditation from the Better Business Bureau and other independent monitoring entities. Make sure the firm is registered with the appropriate regulatory authorities, and is in good standing with the secretary of state. “I don’t recommend going with the first one that calls, because certainly people out there have ways of seeking out people in these situations,” Baringer says. “The best advice I can offer is to go see a lawyer, and if you choose to pursue it anyway, find out as much background as you can.”
Read the engagement letter or contract carefully. Look for clauses that require you to pay money whether the firm is successful in reducing your debt or not. Says Morales: “Get some sort of assurance of a refund or some of your fee returned if they are not able to achieve a favorable outcome.”
If at all possible, do business with a local firm. Says Wendell Fredieu, the owner of Credit One Restoration: “Don’t let someone on an 800 number—somebody you don’t know—decide your financial future.”
Another consideration: Legal action could pose a challenge if the company is headquartered in another state. “If the company is located in New York, you might have to go to court there to get a refund of your money,” Morales says. “That might be impossible to do if you’re already in bad shape financially.”
If the company advises you to stop paying your bills, keep in mind that this will damage your credit. “If somebody tells you to stop paying your bills, go someplace else,” Johnson says. “That’s a big red flag. The people I see who get ripped off are the ones who agree to pay a fee up-front and put money in escrow.”
Keep in mind that the Internal Revenue Service might consider the unpaid portion of your debt settlement to be taxable income, depending on the amount of forgiven debt and your financial solvency at the time of the settlement.
Unfortunately, Wingerter says, the attorney general’s office has little enforcement power in such cases, particularly involving firms outside Louisiana. Local investigators typically send a copy of any complaints to the FTC, and report to the postal inspector if potential mail fraud is involved.
“It’s almost impossible for us in Louisiana to exert jurisdiction in California or Florida—if, in fact, the companies are really there,” she says. “Many times the money goes to a post-office box, and a courier picks it up and it ends up in an offshore account. It’s very frustrating to have to tell people there’s not a lot we can do.”
