Desperate debtors are ripe targets

Promises to wipe credit slate clean often prove empty

By Stephen Franklin

Chicago Tribune Reporter |

August 3, 2008

MATTOON, Ill. — After Darren Robertson got laid off from his factory job, he and Julie Fitzpatrick, his girlfriend, ran up nearly $10,000 in credit card balances on food, gas, medical and heating bills. That’s when Fitzpatrick discovered a company on the Internet that promised to make them debt free.

But things only got worse after they signed up with the company.

Once they stopped paying their credit card bills, as suggested by the debt settlement firm, collectors began calling day and night, and sometimes all day Sunday. Their credit rating plummeted, their debt ballooned to more than $12,000 and Fitzpatrick’s worries soared.

One day two months ago Fitzpatrick, who has cerebral palsy and is nearly deaf, slipped into a room out of Robertson’s sight. “I couldn’t go through with this,” she said with a sad shrug about her bills. She tightened a belt around her neck and planned to pull it, but backed down.

As credit card and related debt soars close to $1 trillion nationwide, more than 500 debt settlement firms have sprung up across the U.S., up from about a dozen a decade ago. Debt settlement has brought salvation and heartbreak for troubled borrowers.

Done right, debt settlement companies act as middlemen between debt-weary consumers and creditors, promising to dramatically trim the amount of money due through negotiations.

Law enforcement officials and consumer advocates say the concept may work for some, but they have doubts about the basic concept. They accuse the companies of selling unrealistic promises and of extracting high fees from unsuspecting consumers. For some borrowers, officials contend, debt settlement is not a realistic lifeline because they owe too much and ultimately are left worse off than when they started.

Travis Plunkett, legislative director of the Consumer Federation of America in Washington, D.C., said that in many cases debt settlement firms “are promising something that they cannot deliver.”

Even debt settlement officials worry about their ranks. They point to out-of-work mortgage brokers and others who have jumped into their business, convinced that debt settlement is a cash cow.

“[New operators] pop up so fast we would need an army to track every new person,” said Jenna Keehnen, head of the U.S. Organizations for Bankruptcy Alternatives, a debt settlement trade group.

“I am sure there are companies that want to make their money and get out fast,” said David Leuthhold, who runs a debt settlement company in Pennsylvania. “That is why we founded our organization,” he said of The Association of Settlement Cos.

How it works

Once consumers sign with a debt settlement company they are usually advised to stop paying bills and instead save cash or put it in an escrow fund. In return, the firm promises to negotiate settlement payments to reduce or wipe out the debt over time. The contract Julie Fitzpatrick signed, for example, claimed she would be “debt free” in three years.

The flaw with the concept is that once consumers stop paying their bills, interest rates on their credit cards go up and so do penalties, consumer advocates and law enforcement officials say. Also, consumers’ credit ratings are likely to suffer, and creditors’ lawsuits can tack on payments and court costs.

Credit card companies and other lenders have their doubts about debt settlement firms. “We don’t work with them,” said an American Express spokeswoman.

“They ought to be viewed with caution,” added Lynne Strang, a spokeswoman for American Financial Services Association, which represents a number of credit card firms and lenders.

Deborah Hagan, chief of the Illinois attorney general’s consumer protection division, said her office has a “number of investigations” under way involving debt settlement firms. “It is almost impossible to operate one of these in a legitimate way.”

Florida Atty. Gen. Bill McCollum, whose office has gone after 18 firms or individuals involved in some form of debt reduction, worries that his state has become a “haven” for companies preying on troubled borrowers via telephone or the Internet. Those he is familiar with are “fly-by-night” operators who “change their name and move a lot,” making it tougher to catch them, he said.

In the last six years the Federal Trade Commission has filed more than a dozen civil actions against debt settlement companies. One firm had more than 44,000 clients but settled less than 2 percent of their debts. Another never contacted creditors while pocketing 25 percent of consumers’ debt as its fee, according to the agency, and in one case a debt settlement company drained $2 million from a client’s trust fund.

“Our concern is whether consumers understand the bargain that they are making when they get into this,” said Sara Gottovi, an attorney with the FTC. “It’s all over the place. There are some [firms] that are more reputable and some that are not reputable at all.”

The agency plans a September hearing in Washington to determine “how the government should deal” with such companies, she said.

Largely unregulated

Debt settlement is so relatively new that only a few states have regulations, even perplexing the industry itself.

“We want to have rules out there because if you don’t, you don’t know what the boundaries are,” said industry group head Keehnen.

The Illinois agency that regulates loan companies contends that debt settlement firms cannot charge more than $50 for initial counseling and $50 a month in fees. But debt settlement companies say the laws are aimed at non-profit counseling firms and do not apply to them.

In January, Illinois ordered SDS West Corp., a California-based firm that was not licensed in Illinois, to stop doing business and pay a $120,000 fine. The order cited an Illinois consumers’ contract requiring a fee payment equal to 15 percent of their debt. SDS West said in a statement to the Tribune that the law cited does not apply to its operations and that if the state wants it to stop doing business, it needs a new law. A hearing date on the matter has not been set.

Credit Solutions of America, the firm Fitzpatrick signed with, also is not licensed in Illinois, according to state officials.

Genie Hayes, an official with Dallas-based Credit Solutions, said in an e-mail, “It’s our understanding that we are in compliance.”

“We are investigating the legal issue and will be making any needed changes as counsel believes the law dictates,” she added. “Credit Solutions works diligently to keep up with all constantly changing legislation, related court and legal rulings and proposed changes in legislation.”

Credit Solutions has had similar problems elsewhere. Last year it refunded more than $700,000 to South Carolina residents after state officials said the firm lacked a license. In January the firm agreed to return $588,000 to Idaho residents for not having a license and for violating laws, Idaho officials said.

In Illinois last year, state Rep. John Fritchey (D- Chicago) offered a bill to bring about regulation of debt settlement companies “before we start hearing horror stories,” he said. The bill is still in the House. The state department of professional and financial regulation said it believes current law applies to debt settlement companies.

One couple’s story

Fitzpatrick and Robertson knew nothing about debt settlement before Robertson was laid off from his temporary factory job in November 2006 and went five months without work or unemployment benefits. The couple used credit cards to get by. Now he earns $8.65 an hour at a Home Depot store. Fitzpatrick is paid $7.50 an hour for 20 hours a week at the public library and $953 monthly in Social Security disability income.

The couple’s debt continued to mount as interest rates and fees grew. While Robertson said Fitzpatrick “believes in paying her debt,” she became increasingly worried.

Because of Fitzpatrick’s disability and hearing loss, Robertson talked on her behalf with the debt settlement firm on the phone after the couple checked it out on the Internet. They agreed to pay a $1,422 fee on a debt of $9,481.

After a few months, the company reached a settlement on one debt, costing them $1,000, half of what they owed. But then bill collectors began calling, and their credit card debt rose to more than $12,000, Robertson said. “I’d call [the debt settlement company] and get a different person or a runaround,” he said. “They kept saying we’ll take care of it, and [the debt] kept going up and up.”

After the Tribune informed the company of the couple’s problems, Credit Solutions returned $928.30 in fees to Fitzpatrick and Robertson and vowed to help reduce their debts without charge.

As for poor service, Hayes said there may have been some confusion because Robertson made the calls on Fitzpatrick’s behalf.

Two people who worked on their account have left the company, Hayes said. “We are 100 percent committed to our customers.”

The couple settled two debts with the fee returned by Credit Solutions. And while the company negotiated a roughly 50 percent reduction of their remaining debts in recent weeks, they still owe about $5,900 and don’t how they will pay it off.

Robertson said he has offered to pay $50 a week to the two creditors. “But they won’t budge. I’m happy [with the debt settlements], but Julie still gets upset because we don’t even have $20 for groceries.”

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