Recent lawsuits in Illinois, Minnesota target ‘debt-relief’ operations; Texas customers of Debt Relief USA face deadline

March 1st, 2010 by Mike Hinshaw

Editor’s Note, to readers or consumers in Texas (and other states) who may be affected: In August, Texas Attorney Greg Abbott took legal action against an Addison, TX-based company called Debt Relief USA. Please see the end of this report for important information regarding an extended deadline that is pending.

Using various search engines to research terms such “personal bankruptcy” can often result in hits for firms promising help with “debt relief.”

We’ve covered this before, but some recent posts turning up in news searches makes us think it’s worthwhile to repeat.

First, legitimate companies do exist that offer “debt relief” or similar counseling services.

Authorities list potential scam signals

However, authorities from various federal and state agencies have issued repeated warnings about firms who make big promises but really do nothing–except maybe get you in even worse trouble.

For instance, under the heading “Protect Yourself,” the Federal Trade Commission lists several warning signs.

“Be wary of credit counseling organizations that:

  • charge high up-front or monthly fees for enrolling in credit counseling or a DMP.
  • pressure you to make “voluntary contributions,” another name for fees.
  • won’t send you free information about the services they provide without requiring you to provide personal financial information, such as credit card account numbers, and balances.
  • try to enroll you in a DMP without spending time reviewing your financial situation.
    offer to enroll you in a DMP without teaching you budgeting and money management skills.
  • demand that you make payments into a DMP before your creditors have accepted you into the program.

Another signal may be when a company advises you to quit paying your creditors–and pay them instead. For example, from the Minnesota attorney general’s Web site: “Debt settlement/negotiation companies promise you quick results to get out of debt. They typically tell you to stop paying your bills altogether and instead save the monthly payments you are making in a savings account. Once you have sufficient funds, the company will supposedly contact your creditors to negotiate a lump-sum payoff of your debt.

Debt settlement/negotiation companies often promise you that they can cut your bills in half or more.”

“Some organizations, such as the Consumer Federation of American, warn consumers not to use debt settlement/negotiation companies. Consumers have told the Attorney General’s Office that debt settlement/negotiation companies have made serious misrepresentations to them that left the consumers far worse off then when they started.

“If you follow the advice of a debt settlement/negotiation company to stop paying your bills, you will likely incur late fees, pay interest-upon-interest, and fall further into default. This may ruin your credit, and some of your creditors may even file lawsuits against you or garnish your wages and/or bank account.”

Recent Attorneys General suits

More recent than the Texas attorney general’s action in the DebtRelief USA bankruptcy, Illinois AG Lisa Madigan filed suit on Feb. 10 against four companies, alleging not only “deceptive practices” but also “excessive fees,” according to Mathew Hathaway in the St. Louis Post-Dispatch.

“The suits allege that the debt-settlement companies violated the Illinois Consumer Fraud and Deceptive Business Practices Act by lying to consumers about the services they provided and failing to disclose the negative impact their work would have on customers’ credit ratings.

” ‘These companies are unfairly luring financially strapped consumers with misleading claims that they can effectively eliminate consumers’ debt,’  Madigan said in a prepared statement. ‘The reality is that, after enrolling in a debt settlement program, consumers too often find themselves in even worse financial straits.’ ”

Even more recently a new law came into play on Feb. 19, when Minnesota AG “Lori Swanson filed lawsuits Thursday against six debt settlement companies, alleging they violated a state law passed last August that requires them to be licensed in Minnesota and cap the fees they can charge. The law generally caps the origination fee paid by the consumer at between $200 and $500. Monthly fees are capped at between $50 and $75,” according to consumeraffairs.com.

“Swanson alleges the six companies overcharged consumers by hundreds or thousands of dollars. The lawsuits–the first filed under the new law–seek injunctive relief, civil penalties against the firms and restitution to victims for the fees they paid.

” ‘What is really unfortunate about these practices is that the consumers who hire companies like these are trying to do the right thing. They know they have financial trouble,’ Swanson said in a statement. ‘They’re trying to hire an advocate to be on their side and help them manage a bad situation. Only rather than get help, they get exploited.’ ”

The 10 companies named as defendants in both states were listed as operating from four states: Arizona, California, Florida and Texas. For a list of the companies named in the Illinois suit and links for following up on complaints, see the press release on the Illinois attorney general’s site. For more about the Minnesota case, see that office’s PR concerning the suit.

‘Bar date’ extended in Texas bankruptcy action

In Texas, consumers who were trapped when DebtRelief USA (aka “No Debt USA”) filed bankruptcy and who have not yet filed a claim have only a few more days to join the proceedings. In a motion of the Bankruptcy Court of the Northern District of Texas, the extended “bar date” (see the first entry under “Claim”) was set for 60 days after the motion was filed on Jan. 5.

However, judging from a Sept. 9 letter to “former or current customers” of Debt Relief USA, Abott is not optimistic about recovering the money of shafted customers: “The Texas Attorney General is working with the Chapter 7 Trustee to ask the Bankruptcy Court to refund your “set-aside” funds to you as fully as possible.”

But, “[b]ecause of the limited funds in the estate, it is unlikely that you will receive a refund of any fees that were paid to the company.Because of the limited funds in the bankruptcy estate, it is unlikely that you will receive a refund of any fees that you paid to the company.

“In the event additional funds are found or recovered, however, further refunds to current and former customers may be made.”

The letter contains contact info for follow-up inquiries.

Also, please be aware that another site uses “Debt Relief USA” in its title, but we know of no legal connection with the Addison-based DebtRelief USA (“No Debt USA”); the company operating debtreliefusa.org may be a New Jersey company, according to this whois registration.