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:
(edited for spam)
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.
Lets tell an alcoholic to “just stop drinking”. Kristy I think you are delusional in the fact that people who have serious debt issues are going to just fix themselves. I do agree with you that debt settlement companies are a complete waste of time and good hard earned money from someone who doesn’t have it, but I also know think there should be community programs or even employer programs that should exist to educate consumers on fiscal responsibility and proper budget management. Then all of the debt settlement leaches will go naturally – then start offering products on “good credit management”…:)
Yeah, it’s hard for “junkies” to stop. However, these people are at least attempting to help themselves. Just giving them fair warning. Why add insult to injury by getting ripped off?
FashionBugHaleigh says go get em, you know who we want to be with, send their asses to jail!
evilalwaysloses, dad, we know we are gonna live with you soon, we cannot wait! mindy and jud just lie to us about everything, we have never lost faith in OUR DADA!!! see you soon, BEACH EVERYDAY WITH MY DAD!!
It is a very unfortunate fact that DMC (Debt Management Companies) are taking advantage of the general consumer. It is not myth but fact where the vast majority of these companies are not there to offer a valued service at all.
A majority of these companies will inform a consumer not not only stop paying the delinquent accounts, but to pay them instead so they can build funds to make offers, mean while accepting funds to pay them self a service fee prior top performing the service.
Secondly they also provide a consumer a script of what to state to both creditors and collections firms when they call. Expressing the consumer has engaged a third party to assist them and they are not able or allowed to talk to the creditor or collections firm any further. This is deceitful and a very poor judgement in legal advise. It is now also common to have a consumer be called with notification of their debt being in collective activity and they are now being provided a tape to play once the creditor identifies them self, that they are retaining a company to handle their debt.
Third, a very large number of these companies now have creditors and collection company phone numbers blocked. So if a creditor does make an attempt to contact the third party management company they can not get through.
I have been in the field of law and collections for many years. I have seen the companies that once provided a service to the consumer now preying on them to make a financial gain from their misfortune. The debt management / reduction company filed is the largest and fastest growing cash cow in the country today.
As a final note…. if consumers would take the time to review their situation and understand they can openly negotiate a settlement or reduction in fees without some company taking money out of their already hurting pockets.
I have had consumers on a three-way call to many of these companies and had them listen in for them self on how they actual take core of their financial interests. Clearly stating the banks full intent if a solution is not rendered by a specific date the consumer will be sued. Their response was in all case very similar. “The consumer does not have enough money in their account to make an offer, they are still paying the representation fee. We doubt the bank will actually sue anyways… so go ahead, we still get paid from them anyways” That is a very discouraging thing for a consumer to hear when they have been fed lie after lie to get them to enroll and take their money.
The attorneys general in most states currently compiling information against these companies and they are filing suit against them. As once is closed down another two open. Most of these companies have a parent company and many, many sub-companies under different names.
You need to check Express Debt Settlement Inc.
Coral Springs Florida and Fort Lauderdale Florida. They have a web page and I think they are frauds the BB has an F rating for them