f/k/a archives . . . real opinions & real haiku

We posted a short blurb this morning about the recent WSJ article “Debt-Relief Firms Attract Complaints” (by Eleanor Laise, Oct. 14, 2008).  Such firms claim to “negotiate” with creditors in order to greatly reduce your overall debt.  The article underscores our own concerns about the services and fees of “debt settlement” or “debt negotiation” firms, some of which are run by lawyers.  See our comprehensive prior post “doubts over debt-negotiation fees” (July 21, 2008), which focused mainly on Net Debt and the affiliated Contego Law Firm. We dug a little further this afternoon, because a person who represents the industry left a comment yesterday saying that the Federal Trade Commission “endorses what we do.”  From my prior research, I doubted that claim.

update (Oct. 30, 2008): Overlawyered.com has been covering the sordid story of The Consumer Law Center, a Florida debt settlement firm run by lawyer Laura Hess and Hess Kennedy Chartered LLC. They have been under investigation by the Florida Attorney General and other state regulators, and by the Florida Bar.  On October 8, 2008, Laura Hess agreed to disbarment.  On Oct. 15, 2008, Florida Attorney General Bill McCollum announced an Initiative to Clean Up Florida’s Debt-Relief Industry (see Sun-Sentinel article; ). And see, “Look Out for that Lifeline,” Business Week, March 6, 2008; and “Insider: Confessions of a Debt-Settlement Company Worker,” The Consumerist (March 2008)

update (May 9, 2009): See “ATTORNEY GENERAL CUOMO ANNOUNCES NATIONWIDE INVESTIGATION INTO DEBT SETTLEMENT INDUSTRY: Subpoenas Fourteen Debt Settlement Companies and One Law Firm in Connection with Probe” (Press Release, NYS AG, May 7, 2009);  and “Cuomo subpoenas debt settlement companies” (Newsday, by John Riley, May 7, 2009, which discusses the Allegro Law Firm); and Consumer Reports (March 2009), on high-fee debt settlement as a “financial trap”.

Here’s what I found out about the FTC and Debt Settlement:

In September 2006, the Federal Trade Commission got an injunction putting several debt negotiation firms out of business, and announced a continuing investigation. (FTC File No.: 052-3091) Its Sept. 21, 2006 Press Release, titled “FTC Stops Nationwide Debt Negotiation Scheme,” notes:

As requested by the Federal Trade Commission, a federal judge has issued a temporary restraining order against a nationwide operation that claimed it could reduce consumers’ debt by up to 60 percent, leading many people into financial ruin and bankruptcy. The FTC charged five companies, including Homeland Financial Services, National Support Services and Prosper Financial Solutions, and their principals with deceptive and unfair practices in violation of Section 5 of the FTC Act.

“These defendants are charged with targeting consumers who were knee deep in debt and luring them with false promises,” said Lydia Parnes, Director of the FTC’s Bureau of Consumer Protection. “Consumers should be leery of anyone who says they can eliminate your unsecured debt, or that you can pay it off for pennies on the dollar. Debt negotiation can be very risky.”

A month ago, the Commission announced the completion of the investigation, saying Debt-Negotiation Defendants Agree to Settle FTC Charges in Nationwide Operation that Led Many Into Financial Ruin.” (Press Release, Sept. 25, 2008)  Click here for links to the Stipulated Orders and other important materials in FTC v. National Support Services, LLC, Dennis Connelly, et al.  (US Dist. Ct., CD Cal, Civil Action No.: SA CV 06-701 DOC (RNBx) ; FTC File No.: 052-3091).  The Orders prohibit the respondent debt negotiators from continuing many of their claims and practices.

The banned activities reflect the Commission’s attitude toward the way debt negotiators conduct their business — often amounting to deceptive, misleading or unfair conduct that harms consumers. The points made in the body of the Press Release are well worth repeating, and I will leave you with them here and beneath the fold:

• The settlement bars them from falsely representing that enrolling in a debt-negotiation program is likely to enable consumers to pay off their credit-card or other unsecured debts for a substantially reduced amount;
• that consumers’ creditors are likely to negotiate settlements under which they will accept substantially less than the amount owed;
• that debt negotiators can negotiate better settlements with creditors than consumers can negotiate themselves; or
• that debt negotiators have an established relationship with creditors that gives them an advantage in negotiating favorable settlements.

The defendants also are barred from falsely representing that negative information that appears on a consumer’s credit report as a result of participating in a debt-negotiation program will be removed upon completion of the program; that any such negative effect on a credit rating, credit score or credit report is likely to be minimal or short-term; that creditors are unlikely to sue consumers who participate in a debt-negotiation program or otherwise fail to make minimum monthly debt payments; or that participating in a debt-negotiation program is likely to end most or all harassment or contact from creditors.

The defendants also are barred from falsely representing that creditors will not contact the consumer after a consumer notifies them to stop; that consumers who participate in a debt-negotiation program do not need to worry about balances on their credit accounts increasing while they are in the program; or that any defendant or any other person will begin negotiating with all of a consumer’s creditors immediately upon enrolling in a debt-negotiation program; or misrepresenting any other fact material to a consumer’s decision to participate in a debt-negotiation, debt-reduction, or debt-management program, or to buy any good or service.

In addition, they are barred from failing to disclose, clearly and conspicuously, before purchase, all information material to a consumer’s decision to buy any debt-negotiation services or credit-related products, programs, or services, including the possibility that, if consumers stop paying creditors, one or more creditors may sue the consumer; the fact that federal law prohibits creditors from misrepresenting a consumer’s payment history to credit reporting agencies and that creditors can report accurate negative information such as delinquencies and charge-offs for seven years; and that when consumers stop paying creditors, their credit account balances will increase due to interest, interest rate increases, and late fees and other charges.

The Commission has basically prohibited debt negotiators from making the claims that are most likely to attract customers, while mandating that they give the debtors the kinds of information that will probably scare them away.  If lawyers providing debt-settlement services — or the firms referring debt-negotiation customers to them — are engaged in any of the practices prohibited by the FTC in this case, they clearly need to assess whether they are living up to their duties under the Rules of Professional Responsibility.