Florida State Attorney General Bill McCollum recently filed two lawsuits against Texas-based Credit Solutions of America, Inc. (CSA) and Clearwater-based ADA of Tampa Bay, Inc., which does business as American Debt Arbitration. The lawsuit against ADA also names the company’s principal Glenn P. Stewart, as well as Arizona-based entities Nationwide Asset Services, Inc., Service Star, LLC, and Universal Debt Reduction, LLC.
The methods employed by most debt settlement firms are similar. According to the complaint filed against CSA and the complaint filed against ADA both companies were:
- Telling their clients to stop making payments on their credit cards
- Opening “trust” accounts for their customers which would supposedly serve as repositories for funds used to make settlements for 50% of the current balance.
- Payments which would ordinarily have gone to pay credit card bills are paid to the debt settlement firms instead. The debt settlement firms would then deposit payments into these “trust” accounts.
- The payment program supposedly lasts for 12-36 months at which time there will be enough money in the trust account to settle the debts with the creditors.
As soon as the clients were making payments to the debt settlement companies, clients started receiving daily calls from credit card companies and collection agencies who sometimes took the consumers to court. The companies provided no legal counsel if the consumers were sued and did not field calls from creditors after the consumers were advised to stop making payments.
Other than the harassing phone calls, the problem with this plan is that for the first three months, CSA was taking 85% of the monthly payments as fees, and ASA was taking as much as 100% of the payments. The beauty of this plan (for the debt settlement companies) is that statistically, most people never complete a debt settlement plan. The companies know this – so all of these fees are collected up front before the clients drop out, without any services being provided.
During a probe of the National Consumer Council, which was shut down by the Federal Trade Commission in 2004 on accusations of falsely claiming nonprofit status, horrifying statistics emerged. The company’s court records show that only 1.4% of the consumers who signed up for the program ever completed it. Nearly half – 42.9% – dropped out, paying an average of $1,780 in fees and saving $966 in their escrow accounts.
Most people do not ask for their money back after unsuccessfully discontinuing the program. With no money having been paid to creditors, they are also left with ruined credit, lawsuits and often left deeper in debt than they started out with.
We’ve long been warning consumers against using these types of companies labeled as debt settlement, debt management, debt negotiation, credit counseling and credit card rate reduction services. Anything they claim to do for you, you can do on your own.
The Florida State AG’s office is currently investigating the practices of over 70 debt relief companies and is litigating five cases, so expect more headlines in the future.
What are your experiences with debt settlement firms if you have used them? Tell us by leaving a comment!
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This article does not do a decent job of detailing the full picture.
Legitimate settlement companies would never tell consumers to go late, or stop making payments.
In 2004-5 Settlement companies worked mainly on a success fee. Virtually no charges up front, a small monthly admin fee, and then a 30% fee on the amount of debt they were able save the client. This practice came under scruntiny and companies were sued for taking too much of the savings. So they changed and moved the fees to the front of the program.
Initially settlement companies forced the consumer to save money in a self controlled trust account. This way when it came time to settle the debt, the money was there to do the deal! Again, regulations and lawsuits came in and forced settlement companies stop requiring clients to save the money in such accounts, and instead simply allow the client to save the money on their own. Guess what, often they don’t. Then it comes time to settle the debt and the client does not have the necessary funds. The client is mad and blames the settlment company. The settlement company is charged with not providing a service. When in reality, the client fell down on their obligations.
The National Consumer Council was NOT a settlemement company, but a credit counseling/debt management service. Yes, and along with them AmeriDebt and hundreds of others were doint the same thing. And who does our Government recommend we turn to when in debt? Credit Counseling.
Success rates:
People in deep debt are there for a reason.
How often is a person successful at a lawsuit?
Howe often is a person successful in Chapter13?
How often are they successful in modifying their loan using the government Hope for Homeowers or other relief service?
How often does AAA sober up a drunk?
All of these “success” rates look as if they suck.
Less than 2% of the applications have been successfully processed in modification. Nearly 40% of Chapter 13 bankruptcies fail, or the consumers find themselves back in Bankruptcy court in less than 10 years.
Does this mean these lawyers and bankers are all scammers?
If a settlement company is telling consumers to stop paying their bills, then they should be sued. However, the FTC and State attorney Generals need to do a better job at understanding why hundreds of millions of dollars have been settled in the past 5 years. THERE IS A NEED outside of credit counseling and bankruptcy.
Consumers need real relief. Regulators need to do a detailed fair evaluation and come up with regulations that offer a profitable business model to settlement companies. Requirements that settlement companies can easily understand and be licensed to provide these services.
There are hundreds of honest Settlement companies that are offering a legitimate service, but are in a continous guessing game with what the FTC and AG’s want them to do.
I’m sorry – but I haven’t heard of many people who have actually gotten a good deal with debt settlement companies. And as far as suing them, they tend to be like the hydra, cut off one head with a suit and the same people just regroup and form a new company.
The best thing to do for consumers is to educate them how to do their own settlements. Especially these days, with banks falling all over themselves to offer good deals (like 20% of balance and payable over a year) – unsolicited, debt settlement companies are a total rip off.
Why would you advocate people working on their own to clear up the mess. Their the ones that created it. I have no problem with most of the debt settlement industry it’s a few rotten apples that spoil the bunch.
What personal gain do you have to tell people not to use a debt settlement company?
It’s the “teach a man to fish” vs. “fish for them” argument. It’s not that tough, especially these days to handle things. What personal gain do I get out of advising people to do this? I think it’s the wrong question. Why would I need personal gain? I just like sleeping well at night.
John, that was an informative post. Thank you for the facts.
Kristi, I think in a perfect world, it would certainly be ideal for a client to handle the settlement themselves, but time and time again, my clients that I assist just don’t have good financial sense. Training them is an important aspect of the program and something I enjoy to watch. A debt settlement program, done correctly with full disclosure of the fees, helps a client set aside money in an account they can’t touch so that when its time to negotiate with a creditor, you have that lump sum to leverage a settlement.
The banks get a nice tax write off of the loss and later they receive income on the settlements. Debt settlement firms are slowly healing the economy by recouping monies that the banks wouldn’t receive on their own.
My ideal debt settlement client is someone with 10k or more in credit card debt who is already a few months behind on their accounts which are going into collections. Most of my clients have a true financial hardship of loss in income, health, illness, failed business, divorce, etc and see no way out. If you would like to read about some solid debt settlement statistics from a third party study, I would go here:
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I’m sorry to infor, you, but “training” isn’t what you guys are about. Most people do not finish the program you’ve set up and they are left with ruined credit and less money than they have started with.
By the way, a perfect world would include no debt “management” companies. Sorry – couldn’t resist.