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Federal investigation boosts concerns over debt-relief firms

Government Accountability Office finds companies give exaggerated descriptions of success rates while many clients end up deeper in debt.

April 22, 2010|Kim Geiger

Reporting from Washington — A new report by undercover government investigators bolsters longstanding concerns that companies promising to help consumers overwhelmed by credit card and other debts often turn out to be financial predators that charge high fees but deliver little or nothing in return.

When investigators for the Government Accountability Office posed as distressed consumers seeking help, so-called debt management companies gave them wildly exaggerated descriptions of the firms' success rates and sometimes promised savings of as much as 50 cents on the dollar, Gregory Kutz, the GAO official who ran the investigation, told Congress on Thursday.

But after paying big up-front fees, often running to several thousand dollars, many consumers end up deeper in debt than they were before seeking help, Kutz said.

Such practices — deemed "fraudulent, deceptive and abusive" by the GAO — have caused complaints about debt relief companies to more than double since 2007, according to the National Assn. of Attorneys General.

Also "particularly despicable," Kutz said, was that three of the companies used Christianity to target customers. Investigators visited one of those companies, A New Beginning Financial located in a strip mall in Orange, where an agent told them that it was a nonprofit ministry, with profit funding missionary trips overseas.

The Federal Trade Commission is considering new rules to prevent debt settlement companies from charging up-front fees and giving inaccurate information about their programs.

Sen. John D. Rockefeller IV (D-W.V.), who ordered the GAO investigation, called the practice "appalling beyond words."

"These debt settlement companies are kicking people when they are down," Rockefeller said Thursday at a hearing of the Senate Commerce, Science and Transportation Committee, which he chairs.

Advertisements by debt management companies, as well as statements by company representatives to GAO investigators, provided evidence that the firms lead clients to believe their services are part of a government program similar to the recent bailout of troubled banks.

One company advertised a "U.S. National Debt Relief Plan," while another said it offered a "government authorized" program.

"It is government approved," a company representative told investigators in a taped conversation. It was one of 20 firms that the GAO contacted in its undercover inquiry.

Jeremiah Martin, who heads, one of the websites contacted by investigators, said in an interview that his company instructs clients to halt credit card payments because the company only accepts consumers who are unable to pay their bills.

"Our program is a hardship program," Martin said. "In order to enroll in our programs, they have to voluntarily agree not to pay their creditors."

In addition to suggesting government backing, the GAO said, companies often tell hard-pressed consumers to stop making payments on their credit card bills and instead to send periodic lump sums to the debt management firms. Those payments are often applied first to the companies' fees before it will begin settling the debt.

"In the most egregious cases, 100% of the consumers' first three or four monthly payments were used for fees," Kutz said.

Company agents tell consumers that halting regular credit card payments will entice creditors to negotiate lower repayment amounts — and they brush off the possibility that doing so can ruin a consumer's credit or spark legal action.

"A judgment is nothing more than a fancy IOU," another agent said, according to the GAO report.

The companies attract customers by promising swift debt relief.

One website ad read, "If we can't get you out of debt in 24 hours, we'll pay you $100!" Investigators visited the company at its Florida address, where the owner told them that the ad was a "typo" and should have read "24 months" instead.

John Ansbach, legislative director of the U.S. Organizations for Bankruptcy Alternatives, an industry trade group that represents debt settlement companies including some of the firms investigated by the GAO, acknowledged that the industry was troubled.

"It's very clear to us that we have significant challenges in our industry," Ansbach told lawmakers.

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