Scam debt-counseling firms fined

By Andrea Coombes, MarketWatch
Last Update: 11:00 PM ET March 30, 2005

SAN FRANCISCO (MarketWatch) -- Thousands of debt-laden consumers seeking help were bilked out of more than $100 million by three companies portraying themselves as debt counselors or

The companies, some claiming to be nonprofit, pitched debt management or negotiation plans and charged up-front fees of as much as $1,000 while customers' bills went unpaid and steep interest charges and penalties accrued, forcing some consumers into bankruptcy, the agency said.

Now the companies are being liquidated as a result of the Federal Trade Commission's charges against them. Customers will get the bulk of about $31 million collected in fines and consumer funds that the companies held in trust accounts.

"These settlements mark the end of the road" for these companies, said Lydia Parnes, acting director of the FTC's Bureau of Consumer Protection, in a press conference.

"If there are other companies out there thinking that they can deceive consumers who are in financial distress, we've got three words for them: Give it up," she said.

The FTC settlements come a week after the agency announced a settlement with AmeriDebt, a credit counseling firm in Maryland, charged with bilking consumers nationwide for $170 million in hidden fees. AmeriDebt is closing its doors after transferring existing accounts to "a reputable third party," the FTC said.

In the three cases announced Wednesday, the 75,000 victims will get some financial redress from the settlements, but it doesn't come close to what they lost.

If you assume that all of the consumers lost an equal amount (which they didn't), each forfeited about $1,333 to the scams. Divvying up the total settlement money equally would mean each consumer got back less than a third of their money, or about $413 each.

In reality, the returned funds will likely be divvied out on a pro-rated basis, based on what each consumer lost. Also, of the $31 million being returned, at least $24 million is money consumers sent to the companies to pay down debt, and was being held in company trust accounts.

"In cases like this, we get whatever we can," Parnes said. "You can't get water from a stone. If we can find the money we get it."

The settlements led to the companies' demise, and will prevent some of the people who ran those companies from engaging in similar practices again. In some cases, the agreement requires $2 million bonds from those seeking to set-up shop again, though none are completely barred from the debt management industry. That's because credit counseling is a legitimate industry, Parnes said, and barring someone would be "extraordinary relief."

"Given that it's very extraordinary and that indeed you can engage in this business in a legitimate way, it would be pretty tough to get a district court to ban individuals from the industry," she said.

Non-profit front

In the largest of the three cases, the National Consumer Council, with businesses registered in California, Nevada and Arizona, claimed to be nonprofit and promised free debt counseling.

But when consumers sought help, the firm sent them to other companies which then charged thousands of dollars to enroll consumers in debt negotiation programs which did little good, and often made consumers' financial situation worse.

Customers thought the companies were negotiating with their creditors and paying their bills, but instead, the upfront fees were going to the firms, and creditors were charging late fees and penalties.

"Many consumers found themselves deeper in debt than when they started," Parnes said.

Just 2 percent of the consumers who enrolled in the debt negotiation program -- or 638 people out of 44,844 -- finished the program, the FTC said.

The FTC also charged the company with violating telemarketing laws by calling people who registered on the Do Not Call list and claiming the organization was non-profit and exempt from the law.

In the settlement, 10 companies that worked with National Consumer Council are also being liquidated: London Financial Group, National Consumer Debt Council, Solidium, J.P. Landis, Financial Rescue Services, United Consumers Law Group, Signature Equities, M&L Springfield Trust, PC Hailey Trust and Via Lido Trust.

In another case, Debt Management Foundation Services, based in Tampa, told customers that debt management plans would reduce their interest rates to as low as 1.5 percent and that the program could rebuild credit. DMFS also claimed, falsely, that it was a non-profit, the FTC said.

"In exchange for fees that ran as high as $1,000, most of this company's clients got a referral to a debt management agency that offered plans ... with less favorable terms," Parnes said.

In the third settlement case, Better Budget Financial Services, based in Beverly, Mass., is charged with claiming it could reduce consumer debt by up to 70 percent and shorten the time needed to pay off debt, in exchange for monthly fees of up to about $40, plus 25 percent of any money a consumer saved in a creditor settlement.

Need debt help? Proceed slowly

Consumers won't be hurt by these companies anymore, but the debt management industry remains a minefield for those who need debt help -- and more will be forced to walk that minefield should Congress pass the bankruptcy legislation currently under consideration. The law would require some consumers to seek credit counseling services.

"This is probably just the tip of the iceberg," said Gerri Detweiler, author of the "Ultimate Credit Handbook" and operator of DebtConsolidationRx.com. "There are a lot more companies making outlandish promises out there in the debt settlement, debt elimination (and) credit counseling industry."

The problem is it's not easy to distinguish a bad operator from one who can help solve your debt problems.

"This is something I've really been struggling with," the FTC's Parnes said. "We can't draw a bright line here." These companies "have legitimate sounding names, some of them misrepresented their status as a nonprofit organization," she said. "There is not any one thing a consumer should look at, but they really need to do some research on this."

Tips on navigating the minefield

Realize that offers of "debt elimination" are usually too good to be true, but the promoters make them sound good and legal. "The arguments are very detailed, very convoluted, and they bury them in a lot of legal jargon referring to court cases ... it looks so legitimate, but unfortunately it's a rip off."

Another common pitch: Debt consolidation. Most consumers think of debt consolidation as combining various loans into one with a lower rate. These days there are few ways to do that other than through a balance transfer to a low-rate credit card, or tapping equity through a home equity loan or cash-out refinance, Detweiler said.

Also, there are debt settlement programs, where companies promise to negotiate with creditors to lower debt balances. While debt settlement through reputable companies can make sense for people eager to avoid bankruptcy, it's hard to find reputable operators and too many debt settlement companies make false promises, Detweiler said.

"It's not a perfect solution. Your credit will be damaged, because you stop paying all your bills," she said.

Consumers in such programs pay what they can into trust accounts. After not receiving payments, "your creditors will start charging off your accounts, and as they do they'll start contacting you," she said.

At that point, the settlement program steps in and negotiates with the creditor. "They say you're in this program, they'll document your hardship, so creditors know you're not trying to scam someone, and they will start negotiating settlements with the creditors, anywhere from 25 cents to 75 cents on the dollar, depending on the creditor," she said.

It can take two to three years to complete the process. "The longer it takes, the more risk you have of being sued," she said.

When visiting any debt-relief or consumer credit organization, consider the following:

Ask about fees, which are often pitched as "voluntary contributions." Make sure you're not paying everything up-front.

Find out what services are offered. Too often, organizations push clients into debt management plans without considering their entire financial picture. Make sure you'll get some financial counseling first.

Call your Better Business Bureau and state Attorney General's office to see whether complaints have been lodged.

For more questions to ask before signing up, go to this FTC page. http://www.ftc.gov/bcp/conline/pubs/credit/debt.htm

If you run into a scam artist, let the FTC know by calling 877-FTC-HELP or by going online to FTC.gov.

"Please let us know if you have a bad experience with any debt services organizations," the FTC's Parnes said. "Consumer complaints directed us to the three companies that we shut down already."
 

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