Debt Settlement Scams

August 13, 2009

Author: Peter Dellinger

Debt Settlement companies promise to help consumers escape from mounting credit card debt, while paying only a fraction of the money owed.  These companies promise to help consumers by negotiating directly with creditors.  Some of them even promise that a lawyer will help with the negotiations.  As the economy worsens, they offer their services as an alternative to bankruptcy.  The Federal Trade Commission estimates that there are now 2,000 debt settlement companies operating in the United States.  As a result, more and more people are turning to debt settlement groups for help in paying their bills. 

Many companies use the Internet to attract consumers, and their advertising can be very convincing.  Here’s an example from Nationwide Asset Services, a debt settlement company based in Phoenix that advertises by mail and on the Internet.  This information was taken from the company’s website on March 5, 2009:

Their underlying message is:  You’re a chump to have gotten so deeply into credit card debt, but you’re really a chump if you pay off the entire amount.[1]

It sounds too good to be true, and unfortunately it is.  Debt Settlement companies are a rip-off.  New York State Attorney General Andrew Cuomo recently alleged that Nationwide had engaged in fraud by promising “a twenty-five to forty percent reduction in its consumers’ outstanding debt, [when] only one-third of one percent of consumers received that savings.”[2]  The Attorney General has established a website,  http://www.ag.ny.gov/bureaus/consumer_frauds/debt_settlement/about_debt_collection.html to warn consumers about these companies.

How the Scam Works

Most debt settlement companies charge an up-front fee to participate in their program, but the industry's fees and fee structures are not uniform.  Nationwide Asset Management charges $1000.  After the consumer pays $1000, Nationwide
figures out a repayment timetable spanning several years, and calculates a monthly payment amount, which is automatically withdrawn from the consumer’s local bank account.  This sum, typically, $200 or more, is transferred to a far-away bank account controlled by Nationwide, which also deducts another $49 a month for “administrative fees”.  The balance is supposed to be used to pay the consumer’s credit card debts.

Meanwhile, Nationwide instructs the consumer to change his/her credit card billing address and telephone number to Nationwide’s office, so that the debt settlement company will receive all communications from the creditor.  In fact, Nationwide tells its customers not talk to their creditors and refer all creditor inquiries to the company.  As part of their services, they promise to handle all the nasty debt collector telephone phone calls.

Default on Credit Card Payments

What Nationwide and most other debt settlement companies fail to mention -or gloss over- is that to obtain their remarkable results, the consumer stops paying on all their credit cards and defaults on all these bills.  Then, after defaulting on the bills, the debt settlement companies wait around for the bill collectors to call and try to negotiate a lower payment for the outstanding bill.  Once a lower pay-off amount is negotiated, Nationwide uses the money in the special bank account to immediately pay off the creditor.

If the consumer’s goal is to default on his or her credit card debts in order to eventually negotiate a lower total payment with a bill collector, most people can do this themselves without paying thousands of dollars to Nationwide or a debt settlement company.  Frequently the consumer could have retained a bankruptcy or private attorney for less money than the amount charged by a debt settlement company.  And, their debt settlement strategy does not work in every case; in some cases, it makes a bad financial situation even worse. 

Consumer Consequences

One of our clients, Mary Boyken, signed up with Nationwide.[3]  She didn’t know that this meant she would default on paying her credit cards.  She later got sued by Citibank for her Visa bill, which was being handled by Nationwide.  She called Nationwide soon after being served with the Citibank complaint.

Nationwide said: “Don’t worry about this.  It’s just one of their scare tactics.  We’ll take care of it.”  A few months later, she received a copy of the Citibank default judgment entered against her.  She called Nationwide again.  Nationwide said: “Don’t worry about this.  It’s just another one of their scare tactics.  We’ll take care of it.”

Two months later, Citibank attached her bank account towards payment of the default judgment.  She had just deposited her paycheck, and all her checks bounced.  Ms. Boyken called Nationwide about what to do.  Nationwide said: “Well, it looks like you’re going to have to handle this debt problem yourself...”

In New York State, debt settlement companies routinely attempt to avoid compliance with two consumer protection statutes, the federal Credit Repair Organizations Act, 15 U.S.C. § 1679a, et seq., and the New York Credit Services Business Law, General Business Law (GBL) § 458-a.  Under these laws, both a “credit repair organization” and a “Credit services business” are defined broadly.  They include “any person who sells, provides any services for money for the express or implied purpose of improving any consumer credit record, credit history or credit rating[.]” [4]

Debt settlement companies routinely charge consumers a large sum of money before performing any services. In this instance, Nationwide, charged Mary Boyken $1000 up front before it did anything.  Both these statutes prohibit credit repair organizations from charging consumers any money until after the credit repair service has been performed.[5]

There are significant remedies for affected consumers when a credit repair business violates these statutes.[6]  As a result, a debt settlement company’s best- and oftentimes only defense to a consumer’s individual lawsuit is to claim that it’s not a “credit repair organization” or a “credit services business”, because it is not in the business of improving a consumer’s credit history, record, or record, even impliedly. 

This leads to a very peculiar and frequently deceptive linguistic dance by debt settlement companies about the purposes of their services.  In order to determine whether a debt settlement company is covered by these statues, it’s important to carefully look at the consumer’s contract, study the company‘s website and analyze their advertising to see if they are exempt from coverage.  For more information about debt settlement companies or these statutes, you can download the pleadings and settlement agreement from Mary Boyken v. Nationwide Asset Services, available on Pacer, or contact Peter Dellinger at Empire Justice. 

Footnotes   

1  According to Nationwide this chart is “*Based on 18% interest.  Chart uses monthly payment of $450 for a fair comparison. In actuality, the minimum payment would decrease as your balance decreased. If you made only the minimum payment each month on this $20,000 debt, you’d pay over $95,000 in interest and it would take you 75 years to repay the debt!” and “**Calculations for Credit Counseling Reorganization Plan were made with estimate calculator at the website of a non-profit organization.”
2  Press release, New York State Attorney General, “Attorney General Cuomo Sues Debt Settlement Companies For Deceiving And Harming Consumers”, May 19, 2009.
3  Boyken v. American Debt Arbitration and Nationwide Asset Services, Inc., Case No. 07 CV 6348 (W.D.N.Y).
4  15 U.S.C. § 1679a(3) and GBL § 458-b(1)
5  15 U.S.C. §1679b(b) and GBL § 458-e
6  Pursuant to 15 U.S.C. §1679g(1), aggrieved an plaintiff is entitled to actual damages or damages equal to the total amount paid by plaintiff to the debt settlement company, whichever is greater; and under GBL §458-I a successful plaintiffs may be awarded three times the amount of actual damages or damages equal to the amount paid to the debt settlement company, whichever is greater; punitive damages, 15 U.S.C. §1679g(2); and reasonable attorney fees, 15 U.S.C. §1679g(3) and GBL §458-I.