Debt Settlement News
Read the latest on Debt, Debt Settlement and Debt Repair.
Debt-Settlement Legislation Would Lift Fee Caps That Protect Consumers
Cleveland Plain Dealer (OH) (02/02/14) ; Williams, Kalitha E.
Nearly 10 years ago, lawmakers passed the Ohio Debt Adjusters Act, intended to protect state residents from debt adjusters that imposed excessive fees and gave false hope to consumers mired in debt. Under the statute, fees are limited to no more than $75 for initial consultation, up to $100 annually for consultation fees, and no more than 8.5 percent of the debt or $30 -- whichever is greater -- for monthly fees.
These reforms were modest, writes Kalitha E. Williams, policy liaison for Policy Matters Ohio, and the debt adjustment industry remains profitable in Ohio as a result. Many indebted consumers seek financial relief, only to find their situation exacerbated after working with for-profit debt adjusters. These firms insist that clients stop making debt payments and fund an escrow account to be used to negotiate with lenders. As the debts grow, consumers are hit with late fees and higher interest rates; and they often have to file for bankruptcy.
Williams writes that these conditions would worsen if House Bill 173 is passed. The proposal would lift the fee caps, on the grounds that federal protections have removed “bad actors” from the debt-adjustment industry. However, the last year alone has seen regulators such as the Federal Trade Commission, the Consumer Financial Protection Bureau, and the U.S. Attorney office in New York taking legal action against such companies.
The Center for Responsible Lending found that consumers only benefit from debt adjustment if they can complete the settlement of at least two-thirds of their debt. Consumers cannot know this before enrolling. A survey from the iA Institute found that nearly half of debt creditor and collector companies refuse to work with debt-settlement companies.
Deny the Debt-Settlement Industry the Carve-Out From Ohio Law They're Seeking in Columbus: Editorial
Cleveland Plain Dealer (OH) (01/19/14) ;
A new bill is pending in Ohio’s Senate, after passing the Ohio House of Representatives, that the Cleveland Plain Dealer editorial board calls "grotesquely anti-consumer." Substitute House Bill 173 purports to “regulate providers of debt settlement services” but actually would offer debt settlement a way to skirt current fee caps under Ohio's existing debt-adjusting law.
Debt adjusters claim to negotiate with creditors on behalf of indebted consumers, intending to persuade a creditor to accept less than the entire balance owed.
A bipartisan 2004 law, Substitute House Bill 420, was passed unanimously and now regulates debt adjusters in Ohio. It forbids debt adjusters to charge “a periodic fee or contribution more than 8.5 percent of the amount paid by [the] debtor each month or $30, whichever is greater,” according to the office of Attorney General Mike DeWine. This law also appears to force debt settlement service providers to observe the monthly 8.5 percent or $30 fee cap, unless the proposed H.B. 173 becomes law.
Morrisey Files Suit Against Debt Settlement Firm
Charleston Gazette (WV) (01/02/14) ;
West Virginia Attorney General Patrick Morrisey has brought a lawsuit against Legal Helpers Debt Resolution in the wake of a two-year investigation launched by his predecessor, Darrell McGraw. The Nevada-based debt settlement firm allegedly collected upfront fees from 250 customers in West Virginia in exchange for helping to resolve their debt problems, but it never settled those debts.
Customers paid more than $198,000 in fees, according to the lawsuit. "We believe ... that the defendants provided no legal services or any discernible value to their customers in the state even though they collected fees from them," Morrisey said in a news release. AGs in Indiana, Illinois, Rhode Island, and Oregon have already filed lawsuits against Legal Helpers. The company agreed to stop doing business in Illinois and paid fines and restitution, but the other cases are pending.
The West Virginia lawsuit alleges that attorneys working with Legal Helpers were not licensed to practice in the state. Legal Helpers failed to "clearly and conspicuously disclose" that it would not settle customers' debts or begin to negotiate debt-settlement agreements until customers had paid all fees in advance, it further claims. The suit is asking a judge to block Legal Helpers from conducting business in West Virginia and is requesting that Legal Helpers refund fees to customers.
4 Ways Debt Settlement Can Burn You
Ebony (12/13/13) ;
Consumers who struggle with debt may consider turning to a debt settlement firm, but this strategy can backfire in several ways.
First, it can damage a credit score. Debt settlement companies usually insist that consumers stop paying their bills for a few months, after which the company contacts the creditors and tries to negotiate settlements on the consumer's behalf. However, failure to pay can stain a credit report and damage FICO credit scores; and even when creditors agree to accept less than the full amount owed, they will report to credit bureaus that the account was “Settled” or “Paid by Settlement,” which still tarnishes credit records.
The second way this tactic can hurt consumers is by risk of lawsuit or court judgment. Instead of reaching an agreement with a debt settlement company, creditors may decide to sue the borrower, get a judgment against him or her, or have wages garnished.
A third reason to avoid debt settlement is that many debt settlement firms also charge high fees, either in the form of a flat fee or a percentage of the total debt.
A fourth drawback is that consumers must pay taxes on the amount of money they saved. Better alternatives to debt settlement include trying to negotiate directly with creditors, or consulting a credit counseling firm.
Colorado AG Suthers Settles With Texas Debt Management Firm 'Operating Illegally'
Denver Business Journal (12/12/13) ;
Colorado Attorney General John Suthers announced that he has resolved a case in which 615 state residents "were financially harmed by a Texas-based debt settlement company that was operating illegally in Colorado." The state received $225,000 in a settlement with the now-defunct CreditAnswers and CEO William Loughborough.
The Consumer Protection Section of the AG's office has entered a stipulation and final agency order with CreditAnswers and Loughborough. Both agreed to permanently stop providing debt-management services to Colorado residents as well as to pay for consumer restitution, reimbursement of legal costs, and for educational purposes.
In February 2012, Suthers' office accused CreditAnswers of providing debt management services that failed to comply with Colorado consumer protection and debt settlement laws. CreditAnswers allegedly failed to provide required consumer disclosures and cancellation notices and engaged in other violations.
Ohio House OKs Bill to Hike Fees for Debt Settlement
Columbus Dispatch (12/05/13) ;
The Ohio House passed a bill Dec. 4 that would allow debt settlement firms to charge higher rates in the state, under protest from consumer advocates. The industry has generated consumer warnings from the Better Business Bureau and Ohio Attorney General Mike DeWine, but the American Fair Credit Council argues that the bill would protect consumers and provide for the operation of legitimate companies.
There is debate over the legitimacy of debt settlement since, under most plans, consumers stop payments on their debts and place money into an account that the settlement firm uses as leverage with creditors. The industry and its fees in Ohio have been regulated under the state's Debt Adjusters Act for about a decade already. Some consumer protection groups oppose the new bill, saying that it would help an industry that already has a poor track record. DeWine warned that “far too many of these businesses fail to deliver on their promises and leave consumers in a worse financial situation.” The measure now moves to the Senate.
How Much Can Collectors Legally Boost Charged-Off Debts?
CreditCards.com (10/17/13) ;
When a consumer defaults on a loan, collectors may try to inflate the debt with interest and fees -- even though card issuers generally stop charging interest after they have written off the debt. In one example, a collector tried to charge Montana resident Tim McCollough $5,500 in additional interest on an unpaid $3,800 credit card balance. Consumer advocates recommend that debtors question these claims.
McCollough won a six-figure judgment in 2011 against collection law firm Johnson, Rodenburg & Lauinger LLC for their abusive practices. About $50 billion in unpaid credit card debts are sold each year, and a January report by the Federal Trade Commission found they are frequently sold with little information about their origins. This makes it more difficult to tell if the amounts are even correct, or whether collectors are going after the right person. Debt buyers are not subject to the Truth in Lending Act, and may charge interest on an unpaid debt without sending the consumer monthly statements.
In 2005, the 7th U.S. Circuit Court of Appeals affirmed that a debt buyer had the right to keep charging interest rates of over 18 percent to two consumers, which supports the principle that the owner of a debt "stands in the shoes" of the original creditor. Some states, however, question debt buyers' ability to charge interest rates above the state statutory limit. The U.S. Fair Debt Collection Practices Act stipulates that collectors can add fees or interest only if the amount is "expressly authorized by the agreement creating the debt or permitted by law," which consumer advocates say requires a copy of the original card agreement to prove.
Advocates say that consumers negotiating with a collector should remember that a debt buyer's claims for interest could be inflated or even baseless. Consumers should never ignore claims, but first determine the amount of their debt at charge off (the "principal amount"). This could be the basis for negotiating with a collector to settle the debt.
Consumer Agency Fines Payment Processor Meracord Over Debt-Relief Firms' Illegal Fees
Washington Post (10/04/13) ;
The Consumer Financial Protection Bureau (CFPB) has fined Meracord, one of the country's largest payment-processing companies, $1.3 million for helping debt-relief firms levy illegal upfront fees on struggling consumers. According to the regulator, Meracord processed at least $11 million in illicit fees from October 2010 to July of this year. Of more than 11,000 consumers who paid the upfront charges, almost 5,000 of them did not have any of their debts resolved.
The CFPB intends to compensate affected consumers using its civil penalty fund. The enforcement action against Meracord is part of a sweeping crackdown on companies that take advantage of people trying to get rid of debt. The CFPB is not only going after the firms themselves but also the companies that facilitate withdrawal of funds from consumers' accounts. "If a business is enabling bad actions that hurt consumers, then we will use our authority to stop them," declared CFPB deputy director Steven Antonakes. "We are making the point here, and it applies to all companies that do business with consumer financial providers."
Postal Inspectors: Ask About the Fees
digtriad.com (09/16/13) ;
U.S. postal inspectors are warning consumers to be wary who they pick to help them manage heavy debt. U.S. Postal Inspector Robert Clark says some firms are offering to settle debts for 45 percent of the debt. In one case, the company asked customers to sign a three- or four-year contract agreeing to the deal, stop talking to creditors, and make a monthly payment. However, 1,200 customers said the firm collected $2.2 million in fees and failed to dissolve the debt. Some customers never asked about the $49 in monthly fees due to the seemingly attractive deal they were being offered; and even when salespeople were asked about fees, they only answered with prepared statements.
The company owner had no regard for the complaints and was only concerned with signing up customers. Postal authorities say the best way to determine if a debt settlement company is reputable is if it discloses all fees up front and is not trying to expedite the contract process. A new law also requires companies to meet customers in person to sign a contract. Customers should also be aware they can work out payment options with credit card companies without outside help.
Debt Collectors Get More U.S. Consumer Bureau Oversight
Bloomberg (09/05/13) ;
Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), on Sept. 4 announced that his agency will begin drafting new rules under a federal law governing the debt collection industry and will also "continue to pursue a lot of enforcement work we've been doing."
The 2010 Dodd-Frank Act that created the CFPB also authorized the watchdog to write regulations under the Fair Debt Collection Practices Act of 1977. The agency can oversee debt collection from when credit is extended -- such as via credit cards issued by banks -- through the purchase of charged-off debt by companies. The CFPB's work "will really matter to Americans who often feel harassed and oppressed, or are being chased over debts they don't think they owe," Cordray said.
Debt-Settlement Bill Riles Critics
Columbus Dispatch (09/03/13) ;
The Ohio legislature is tussling over a bill that would allow the debt settlement industry to impose higher fees in the state. Some groups that fought against the payday lending industry are now trying to block House Bill 173, which supporters say would bring clarity to Ohio laws for companies that offer to settle consumer debt.
Brian Tawney of the American Fair Credit Council says the measure would allow legitimate debt settlement providers to operate in Ohio. Linda Cook, senior staff attorney for the Ohio Poverty Law Center, argues that the industry already is permitted to operate in Ohio but must do so under state fee caps: either 8.5 percent of the amount of debt payments by the consumer each month or $30.
Critics of the bill say it would allow the industry to charge desperate consumers higher fees. Most debt settlement plans have consumers stop payments and instead place money into an account that the settlement company uses to leverage settlements with creditors for less than what is owed. The Center for Responsible Lending (CRL) warns of high fees charged by these settlement firms, noting that many clients are left with unresolved debts. “Any savings achieved on one or two settled debts is wiped out by the growth of debts that are not settled,” Ellen Harnick, CRL's senior policy counsel, told federal officials in 2012.
FTC Wins $5.7M From Debt-Relief Scammers
Law360 (08/27/13) ;
U.S. District Judge James S. Gwin in Ohio has ordered several debt counseling firms to pay $5.7 million to consumers for allegedly using scripted telemarketers to lure people into signing debt-consolidation contracts that the companies did not fulfill.
The U.S. Federal Trade Commission accused defendants Dan Michaels and James Benhaim of operating a series of related businesses in the United States and Canada. Gwin found that the defendants' business practices violated the Federal Trade Commission Act, the Telemarketing Sales Rule, and the Mortgage Assistance Relief Services Rule.
Telemarketers from the companies would falsely tell consumers that they were calling from a current lender's wholesale department, that they had special relationships with the consumer's creditors when they really did not, or that consumers could save hundreds of dollars a month. Often consumers would be convinced to pay thousands of dollars in upfront fees, receiving little or no services in return. The judge also said that the companies would instruct consumers to stop paying their monthly bills while the company negotiated their debt settlements. The defendants were found to have misrepresented the total costs and characteristics of their services as well as the amount of money that consumers would save.
U.S. Consumer Bureau Files Lawsuit Against Nevada Debt-Relief Firm
Reuters (08/20/13) ;
The U.S. Consumer Financial Protection Bureau is taking Morgan Drexen, a Nevada-based debt settlement company, to court for allegedly imposing improper fees and misleading the public about its services. The federal watchdog agency alleges that Morgan Drexen charged upfront fees for debt relief services, even though firms are not allowed to collect such payment until after they have helped to settle or lower a borrower's debt. The company also is accused of deceiving consumers into believing they would be debt-free after a few months of the company's services.
Settlement Company Banned
Lebanon Express (OR) (07/10/13) ;
The Oregon Department of Justice and the Oregon Department of Consumer and Business Services together obtained a court order that prohibits World Law Debt and several of its affiliates from conducting business in the state. The two agencies accused World Law Debt, a Texas-based debt settlement company, of violating Oregon’s Unlawful Trade Practices Act by imposing excessive fees and inaccurately claiming that it had Oregon attorneys on staff to handle client cases. The lawsuit also alleges that World Law Debt collected $1.5 million from Oregon clients but paid just $275,211 to their creditors and kept more than $960,000 in fees. A temporary restraining order prohibits World Law Debt and its affiliates from doing business in Oregon, and the state will seek a longer-term ban later this month. Oregon's Department of Consumer and Business Services fined World Law Debt $70,000 last September for failing to register before doing business in the state. The company has not paid the fine and remains unregistered, according to the lawsuit. The Department of Justice is seeking more than $10 million in civil penalties, and the state is also demanding World Law Debt fully refund its Oregon customers.
Consumer Credit Industry Criticizes Ohio, Pennsylvania Legislation on Debt Settlement
BankCreditNews.com (06/27/13) ;
Proposed legislation in Ohio and Pennsylvania would increase regulation of the for-profit debt settlement industry, but some members of the industry say the bills ignore the practices most detrimental to consumers. Ohio H.B. 173 would codify consumer protections adopted by the Federal Trade Commission, while Pennsylvania S.B. 622 would mandate licensure for individuals who offer debt-settlement services. The Association of Independent Consumer Credit Counseling Agencies has contacted both state legislatures to voice its concerns. “Recent actions taken by the Consumer Financial Protection Bureau against abusive and even criminal debt settlement abuses would indicate that many consumers are still suffering because of the practices of some for-profit debt settlement companies, and these proposed bills will not help address the problem without substantial amendment,” declared association president David Jones. The group has recommended caps on fees, restrictions on enrolling consumers with financial conditions that may not yield a successful debt settlement program, and stiffer penalties for violations.
Regulators Stepping Up Probes of Debt Collectors' Practices
Los Angeles Times (06/22/13) ;
State and federal regulators are pressing debt collectors over their use of faulty records in litigation against credit card borrowers. Authorities say that, in some cases, paperwork was so flawed that borrowers were not even aware of lawsuits against them until their wages were garnished or assets seized after they failed to appear in court. At the state level, the California attorney general's office is leading a broad investigation of the debt collection industry, focusing on firms that buy delinquent credit-card accounts at a discount, then sue borrowers for the payments. That probe already has spawned a civil lawsuit against JPMorgan Chase, in which California Attorney General Kamala Harris accused JPMorgan and Chase Bank of running a "massive debt collection mill" that led to more than 100,000 lawsuits statewide based on shoddy documents, including some signed by low-level employees posing as bank officers. In one case, Oakland resident Tommie Sexton fell behind on payments for his Chase credit cards only to be sued by debt buyer Midland Funding for $7,000 in unpaid bills, including interest. Midland filed copies of Sexton's credit card statements and an affidavit that Chase had sold the account to Midland; but Sexton argued that the documents were not enough to prove Midland owned the debt, especially because the affidavit was created after he was sued. Sexton and Midland eventually settled. Such shoddy documents are "ubiquitous" in the debt collection industry, said Peter Holland, an assistant professor at the University of Maryland law school. AGs in more than a dozen other states have responded by banding together to look into similar incidences; and at least three federal agencies, including the Consumer Financial Protection Bureau, are scrutinizing debt collectors.
Wisconsin Sues Chicago Debt Firm, Alleges Illegal Fee Collection
Milwaukee Journal Sentinel (WI) (06/17/13) ;
Several Wisconsin state agencies are suing Legal Helpers Debt Resolution, alleging that the Chicago-based firm illegally collected millions of dollars in fees from Wisconsin consumers seeking debt relief. Prosecutors say Legal Helpers portrayed itself as a law firm when it really operated a debt settlement service, enrolling about 1,900 Wisconsin consumers. The outfit charged clients illegal upfront fees of $500 to $900 as well as monthly fees of $50 to $75, although the customers received few, if any results, according to the Wisconsin attorney general's office. To operate a debt resolution or debt settlement service in Wisconsin, a company must obtain an adjustment service license from the state, which Legal Helpers never had. The debt resolution services were provided by third parties who were not attorneys or properly licensed. The complaint says that state agencies -- including the Department of Agriculture, Trade and Consumer Protection and the Department of Financial Institutions -- fielded more than 70 consumer grievances about Legal Helpers in the past three years. Many complaints said that Legal Helpers had promised to get in touch with creditors to stop or reduce the number of calls,but regularly misplaced documents and failed to consult with creditors in a timely manner. The firm also instructed clients to stop making minimum payments to creditors, causing them to rack up more fees and additional interest on outstanding balances. The state is seeking penalties of up to $10,000 per violation, possible imprisonment for the defendants, and restitution to consumers.
Courts Clogged by Debt Cases, 'Rubber Stamp' Rulings, Advocacy Group Says
NBC News (06/05/13) ;
Plaintiffs' attorneys seeking judgments against alleged debtors in New York hog 89 percent of the court docket in Rochester, 76 percent in Buffalo, and 77 percent in the Capital District near Albany, according to a report by the New Economy Project. The high percentage of lawsuits that involve debt collection is not unique to the state, however. Consumer advocates across the United States cite this as an escalating issue. Susan Shin, staff attorney at the New Economy Project, says the collection industry has a careless attitude toward the legal system and that courts are making "rubber stamp" judgments. For its research, the advocacy group examined data from the New York State Office of Court Administrators covering 195,105 debt collection cases filed against New Yorkers in 2011. Most cases lack a defense, and nearly half are settled by "default judgment” because the defendant did not appear. One consumer, Brian Pindell, was unaware that a debt collection firm had sued him and won two judgments in 2007, until his application for a $4,500 Small Business Administration loan was denied in 2012. Pindell claims he was never served with legal papers and still does not know what the alleged debt is. Collection agencies often file cases with incomplete paperwork, or file so frequently that the signer could not understand what was signed. Sometimes agencies have their employees sign documents asserting facts they could not know. However, the New Economy Project report found that the court rejected improper paperwork in only two of 90 randomly chosen cases.
Consumer Watchdog Takes Its First Action Against Abusive Practices
The Hill (05/30/13) ;
The Consumer Financial Protection Bureau is, for the first time, taking action against a company for abusive practices that confused or misled the public. The agency brought a complaint May 30 against American Debt Settlement Solutions Inc., a Florida debt-relief company, and its owner, alleging that the firm had charged illegal upfront fees and had misrepresented itself and its services to consumers nationwide. About 89 percent of its clients who paid these "enrollment" fees, many of whom the company knew could not afford them, never had their debt reduced or changed in any manner by the company. The CFPB also accused the firm of violating a Federal Trade Commission law banning fraudulent telemarketing calls. It is seeking to stop American Debt Settlement Solutions' operations, block it from offering debt-relief services, and impose a fine of $15,000 on the company.
NY Debt-Settlement Agency Charged With Fraud
Associated Press (05/07/13) ;
U.S. Attorney Preet Bharara of the Southern District of New York confirms that debt settlement firm Mission Settlement Agency, its owner Michael Levitis, and three employees have been charged with mail and wire fraud. Federal prosecutors say that although the company advertised debt settlement services, it actually defrauded more than 1,200 debt-ridden individuals out of a total of millions of dollars by lying about its fees. Prosecutors also say that Mission employees lied about the company's debt reduction results.