Debt Settlement Firms Adopt "Attorney Model" to Evade State and Federal Rules


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Published: November 7, 2013

Morgan Drexen Case Illustrates Harm to Consumers

In the past, debt settlement companies typically charged hefty fees upon enrollment, before settling any debts. This practice created heavy incentives for companies to sign up as many people as possible, collect fees, and not settle any debts. In light of these problems, the Federal Trade Commission (FTC) issued rules regulating debt relief in 2010. Among the most significant of these provisions is an “advance fee ban,” which allows firms to collect fees on accounts only when a settlement agreement has been reached and at least one settlement payment has been made by the consumer to the creditor.

Following the issuance of the FTC rule, there has been a rise in various attorney-related debt settlement models, in an apparent effort to evade both the FTC’s advance fee ban, as well as state laws that often exempt attorneys from their debt settlement regulations. Although the models differ across companies, in each, attorneys and non-attorneys are affiliated, but the attorneys are present only to provide a cover for collecting advance fees. 

One of the primary models of attorney model evasion is represented by Morgan Drexen. In August 2013, the Consumer Financial Protection Bureau (CFPB) filed a lawsuit against Morgan Drexen, alleging that it charges illegal upfront fees and deceives consumers. According to the Complaint, at least 22,000 consumers have enrolled in Morgan Drexen’s program since the implementation of the FTC rule and have been charged millions of dollars in up-front fees. The CFPB alleges that only a “tiny fraction” of enrollees has all of their debts settled, and most do not have any debts settled.

This paper discusses in more detail the rise of the "attorney model" for debt settlement, and the Morgan Drexen model specifically.