TILL DEBT DO US PART Companies offer chance to avoid bankruptcy, but scam artists abound
The ads are everywhere — on the Internet, in your e-mail and on the radio.
“Secret program the credit-card companies don’t want you to know about.” “Eliminate 75 percent of your debt without a bankruptcy.” “Cut payments, get out of debt and save.”
A free lunch always sounds good, but never better than now with Americans staggering under near-record debt loads and losing their jobs by the hundreds of thousands every month. It is true that credit-card issuers are increasingly willing to negotiate repayment terms with their customers. And there is a booming cottage industry of providers offering to negotiate on your behalf — usually for a big upfront fee.
After all, you may owe money to half a dozen card issuers, and trying to reach a settlement on your own can be difficult. Don’t expect your creditors to play nice.
But the real sharks in the water are not the companies demanding repayment but the scam artists who fleece people drowning in debt by promising to throw them a life preserver — for just a few thousand dollars more.
“The concern is that many consumers aren’t getting any services at all in the vast majority of cases or not nearly the amount promised,” said Alison Brown, a staff attorney for the Federal Trade Commission.
Such abuses have brought increased scrutiny from regulators and law enforcement.
The industry took off four years ago after federal bankruptcy reform made it more difficult for debtors to shed their obligations, according to Michael P. Kerr, legislative director for the National Conference of Commissioners on Uniform State Laws. The group is appointed by the nation’s governors.
“Debt settlement really popped up into existence in 2004-05, and states are just now adjusting to the mass of market participants,” Mr. Kerr said. “There are some completely illegitimate players out there.”
Keith Nelms and his debtsettlement fir m, Allegro Law, were sued by the state of Alabama last month for fraudulent practices.
The firm was accused of operating one of the biggest debtsettlement schemes in the country, operating in all 50 states and collecting millions of dollars from 15,000 customers. Prosecutors charge the company pocketed hefty fees yet did nothing to help its clients.
Mr. Nelms had his law license suspended for three years in July.
In May, West Virginia sued James R. Armstrong Jr. of Coral Springs, Fla., charging he “masterminded a web of for-profit companies to enrich himself under the guise of providing debt-management services with Family Credit Counseling Corporation,” which he controlled.
Scam artists thrive on the patchwork of state laws that allow them to operate virtually unregulated in some states. Mr. Kerr’s group has worked to sew up that patch- work. Its proposed legislation has been adopted in a handful of states and calls for debt-relief fees to be spread out over 18 months.
The FTC is taking public comments through Oct. 9 on even stricter proposed regulations that would bar fee collection until after the debts are settled. A public forum — less formal than a hearing — will be held on the proposal in November.
The Association of Settlement Companies, one of the main trade groups for the debt-settlement industr y, sees that as a mortal threat to the business.
The group prefers the legislation advanced by the commission on uniform state laws, and is working closely with the states on it, said Wesley Young, legislative director for the group.
“We do substantial amounts of work before we settle the debt. When you have a consumer who has finished the program before he is finished paying the fee, we have trouble collecting the rest of the fee,” Mr. Young said.
“I don’t think all the problems come from bad players, although there certainly are bad players. But some are just new to the industry and inexperienced,” he said.
Critics say such debt-settlement trade groups — also including the United States Organization for Bankruptcy Alter natives — have not weeded out those bad actors.
“These attempts at selfregulation have failed miserably. I look at them as price collusion,” said Michael Bovee, founder of the Consumer Recovery Network, a debt-settlement and consumer-education company based in Sandpoint, Idaho.
“If you charge the kind of fees that 90 percent of the companies in my industry charge, in my opinion you’re driving them toward bankruptcy,” said Mr. Bovee, who favors federal regulations.
Mr. Young countered that “negative perceptions” about debt settlement are being spread by rivals such as debt-management organizations that are just fighting for market share.