Credit Card Debt Settlement Scams

CREDIT CARD DEBT SETTLEMENT SCAMS:  NEW DEVELOPMENTS

Ms. Fry, a Washington state resident, completed an on-line debt evaluation offered through a debt settlement company’s website. Ms. Fry was then repeatedly called by company representatives who solicited her to retain them for debt settlement services in the spring of 2010. Company representatives told Ms. Fry that she would be represented by attorneys at their firm and that those attorneys would work with her to settle her debts. As a result of those representations, Ms. Fry signed a contract (“Attorney Retainer Agreement”) with the company for debt settlement services that also provided authorization to another company to make withdrawals from her bank account in order to fund the services.The debt settlement company’s debt settlement model led to the garnishment of Ms. Fry’s pay. The company told Ms. Fry that they would make arrangements with all of her creditors for the payment of her debt. However, the company only contacted the creditor to whom she owed the least money. That meant that the largest creditor was neither contacted nor paid at all. The largest creditor was by virtue of the amount of the debt owed the most likely to sue Ms. Fry and garnish her paycheck. That is precisely what occurred. When the large creditor inevitably sent Ms. Fry a summons and complaint, she turned to the debt settlement company to assist her. However, company now told her that they were debt negotiators and not attorneys and they could not assist or advise her in the legal matter.The debt settlement company misrepresented the nature of its services to Ms. Fry. Ms. Fry never spoke to an attorney. In fact, once her paycheck began to be garnished by a creditor, she was told by the company that they were negotiators and not attorneys and could not assist her with the garnishment.The debt settlement company charged an excessive and unreasonable fee. The contract allowed that the company’s fee was fifteen percent of the total debt owed by Ms. Fry. The company was entitled to an equivalent of another five percent of the total debt owed if it achieved a reduction of her debt by 65% during settlement. That latter “bonus” was described in the contract as a “contingency fee.” The company subsequently made twenty withdrawals from Ms. Fry’s bank account. None of the first four payments made went to a creditor. The overwhelming majority of the next eleven payments went towards monthly administrative and maintenance costs. Of the $16,291.80 that she paid to the company, only $5,133.49 was “saved” to pay her credit card debt.

Legal Analysis

1. Such Debt Settlement Companies are Subject to Washington Regulation.

The Company is a debt adjusting agency under Washington State law subject to the provisions of Revised Code of Washington. Section 18.28 defines “debt adjusting” as “the managing, counseling, settling, adjusting, prorating, or liquidating of the indebtedness of a debtor, or receiving funds for the purpose of distributing said funds among creditors in payment or partial payment of obligations of a debtor.” RCW § 18.28.010(1). A debt adjuster or debt adjusting agency is any person or business that engages in the business of debt adjusting for compensation. Using almost identical language as the Statute, the company’s retainer agreement, signed by Ms. Fry, was for the purpose of “advice, counseling, analysis and negotiations services in regard to Client’s unsecured debt. . .” The Company is thus subject to the provisions of the Act.

The Company is not exempt from the Debt Adjusting Act. The Company is not performing services “solely incidental to the practice of” law, which is the attorneys behind the Company’s profession. The Company acted as if it was an independent entity from the law firm associated with it and one that did not provide legal services. Ms. Fry sought debt adjusting services from the Company and spoke to employees who identified themselves as working for the Company. Ms. Fry never spoke to an attorney. Rather, she dealt with a “Debt Manager” or “counselor” in the “Debt Management Department.” The Company’s activities were clearly not incidental to its practice of law.

There are fee limitations for the provision of debt adjusting services. The Washington Supreme Court has recently ruled that an entity that provides debt adjusting services may not charge more than fifteen percent of any one payment made by or on behalf of the debtor. Carlsen v. Global Client Solutions, LLC, 171 Wn.2d 486, 499 (2011). The Court held that fee limits apply when the entity is either a debt adjuster or providing debt adjusting services. Accordingly, even if the Company argues that it is not a debt adjuster subject to the Act, its debt adjusting activities subject its payment schedule to the limitations contained in the Act. Further, the Court held that Global Client Solutions was subject to the limitations of and liabilities under the Act by virtue of its assisting a debt adjuster.

The Attorney General’s Office on Consumer Fraud and the Department of Financial Institutions enforce this statute. Violation of the Statute is also a per se violation of the Consumer Protection Act, entitling the debtor to treble damages in civil litigation.

2. Federal Trade Commission and Other Complaints.

The FTC has authority under the Telemarketing Sales Rule to act in cases of debt settlement fraud. That rule prohibits companies from making misrepresentations about any product or service, including claims about financial products or services. The statute also requires that companies have competent and reliable evidence to back up key claims about their financial products or services. The Company made misrepresentations about its services. Ms. Fry never spoke to nor was represented by an attorney. Additionally, the model of debt settlement utilized by the Company inevitably led to default, garnishment, and further harm to the debtor’s credit. As was stated, the Company paid off the smallest creditors first. That left the creditors most likely to incur the expense of litigation, e.g., the largest ones, unpaid. When the largest accounts went into default the debtor was sued. That is an inherently flawed model that could also give rise to complaints for legal malpractice and/or violation of the code of professional conduct for attorneys.

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